ELSS for Tax Saving and Wealth Creation: When it comes to investment for tax saving, the first schemes that come to mind are Public Provident Fund (PPF), Tax Saving Fixed Deposit (Tax Saving Bank FD), National Pension System (NPS) Tier 1 Account and Employees Provident Fund (EPF). Investing in all these schemes provides tax exemption under Section 80C of the Income Tax Act. But in most of these schemes, the annual rate of return remains around 7-8 percent. Still, people invest in them to protect their capital and save tax. Apart from these popular schemes, there is another investment option, which is becoming quite popular for tax saving. This investment option is Equity Linked Savings Scheme (ELSS). So let’s understand the profit and loss of investing in it.
Why invest in ELSS
Equity Linked Savings Scheme (ELSS) means a Mutual Funds scheme through which investment is mainly made in the stock market. According to SEBI rules, it is necessary to invest at least 80% of the ELSS fund in equity. In reality, this share is much more than this. Due to the large exposure to equity, high returns are expected in this scheme. Tax saving ELSS provides tax exemption under Section 80C of the Income Tax Act on investment of up to Rs 1.5 lakh every year. A lock-in period of 3 years is also applicable on investments made for tax saving in this scheme. That is, it is necessary to maintain the investment for at least 3 years. After 3 years, if you withdraw your money by selling the units of the scheme, then the profit on it is considered as Long Term Capital Gain (LTCG).
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How much tax is levied on ELSS
There is no LTCG tax on profit of up to Rs 1.25 lakh made during a financial year on selling ELSS units. If the profit is more than Rs 1.25 lakh, LTCG tax has to be paid at the rate of 12.5%. Despite this, it is beneficial for taxpayers falling in the higher tax slab, because they have to pay tax at the rate of 12.5% instead of their slab rate. Another good thing is that among all the tax saving options available under 80C, ELSS has the lowest lock-in period of 3 years. That is, this scheme is also the best in terms of liquidity. Also, you can invest money in ELSS through SIP, which helps in reducing the risk associated with wrong timing of investment in the market. The good thing is that one can invest in ELSS not only to save tax, but also for better returns. The figures given below for the top 10 ELSS funds are proof of this.
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Past Performance of Top ELSS Funds
The country’s top 10 equity linked savings schemes (ELSS) have given excellent returns in the last 5 years. Some of these funds have given an average annual return of more than 30%. If we take into account the tax benefits available on ELSS, then this return will look even more attractive. The figures for all schemes are based on the annual average return of direct schemes.
1. Quant ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 38.18%
Return on SIP investment in 5 years: 38.33%
Asset Under Management (AUM): Rs 11,065 crore
Expense Ratio : 0.71%
2. Bank of India ELSS Tax Saver Fund Dir
Return on lump sum investment in 5 years: 30.67%
Return on SIP investment in 5 years: 31.82%
Asset Under Management (AUM): Rs 1,485 crore
Expense Ratio : 0.96%
3. SBI Long Term Equity Fund (Direct)
Return on lump sum investment in 5 years: 28.52%
Return on SIP investment in 5 years: 34.02%
Asset Under Management (AUM): Rs 27,527 crore
Expense Ratio : 0.95%
4. Motilal Oswal ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 27.20%
Return on SIP investment in 5 years: 33.43%
Asset Under Management (AUM): Rs 3,835 crore
Expense Ratio : 0.65%
5. Bandhan ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 26.93%
Return on SIP investment in 5 years: 29.36%
Asset Under Management (AUM): Rs 7,179 crore
Expense Ratio : 0.63%
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6.JM ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 26.72%
Return on SIP investment in 5 years: 31.58%
Asset Under Management (AUM): Rs 173 crore
Expense Ratio : 1.13%
7. Parag Parikh ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 26.40%
Return on SIP investment in 5 years: 27.83%
Asset under management (AUM): Rs 4,017 crore
Expense Ratio : 0.62%
8. DSP ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 26.07%
Return on SIP investment in 5 years: 30.05%
Asset Under Management (AUM): Rs 17,268 crore
Expense Ratio : 0.69%
9. Canara Robeco ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 25.09%
Return on SIP investment in 5 years: 26.03%
Asset Under Management (AUM): Rs 8,876 crore
Expense Ratio : 0.51%
10. Mirae Asset ELSS Tax Saver (Direct)
Return on lump sum investment in 5 years: 24.99%
Return on SIP investment in 5 years: 26.84%
Asset Under Management (AUM): Rs Crore
Expense Ratio : 0.58%
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Take the decision keeping in mind the risk profile
The return data of the top 10 ELSS funds given above shows that investing in ELSS provides tax benefits as well as the benefit of wealth creation in the long term. But investors should decide to invest in it keeping in mind their risk profile, because being an equity linked scheme, there is always a market risk in it. The data of the top 10 ELSS schemes also shows that the return on SIP is usually better than the return on lump sum investment and it also provides the benefit of cost averaging. Apart from this, it should also be kept in mind that even though the lock in period in ELSS is 3 years, the full benefit of the investment is available only by making regular investments for a long period i.e. 5-7 years or more.
(Disclaimer: The purpose of this article is only to provide information, not to recommend investment in any scheme. Market risk is always associated with equity mutual funds. Take any decision only after getting complete information and taking the advice of your investment advisor.)
