Taxes grow without rain. Like it or not, you have to pay your taxes. The trouble is that understanding taxation requires more than a genius mind. Albert Einstein admitted, “The hardest thing in the world to understand is the income tax.”
Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebate and allowances while ensuring that your investments are in line with your long term goals.
What is ELSS Mutual Fund
ELSS are mutual fund scheme & are quite similar to diversified equity funds of Mutual Fund. As the name suggests, the scheme primarily invests in equity market by buying equity stocks of companies listed on the stock exchanges.
The units of the scheme are offered at the NAV (Net Asset Value). The NAV is announced for all business days and keeps changing primarily depending upon the movement in the prices of stocks held in the portfolio of the scheme.
Comparison of various tax saving instruments
Apart from these, insurance premium on life insurance policies(you all know why insurance is mutual not there in above table) and principal component of housing loan are also eligible for Section 80 C benefit.
Benefits of ELSS MF
Tax benefit at the Investment
You can get tax benefit under section 80 C of Income tax. Maximum limit is Rs 100000.
Lockin period of ELSS is 3 year which is shortest in comparison to any other tax saving investment. This lockin is the only difference between diversified equity mutual funds & ELSS.
Tax free return
Any profit/ capital gain you have from ELSS is completely tax free. If you see return from NSC & Tax saving Bank FDs they are completely taxable & added to your income. Only PPF Offers tax- free return but it has a maturity period of 15 years.
Tax free dividends
ELSSschemeskeeps giving dividend on regular intervals & the whole dividend you receive is tax free.
No entry Loads (Less Expensive)
Say if you invest Rs 10000 in ELSS Scheme your complete Rs 10000 is invested in Mutual Fund. You have to decide how much want to pay your advisor. BEWARE some insurance agents sell ULIPS as Mutual Fund + Insurance with lots of expenses.
Equity funds can be volatile in the short run, but have been known to beat inflation and create wealth over the long run. If you are looking at investing some money that you won’t need future, and are willing to ride the ups and downs of the market, you may find ELSS an ideal tax saving option.
Actual Value of Rs. 1 Lac invested in ELSS
Returns as on 30 Nov 2010 – Average Returns of all ELSS schemes in the period
Best ELSS in India 2010 – 2011
Best fund comes out after postmortem so consider them as “Top 10 ELSS Fund in last 10 years”
|Return (%)||Return (%)||Return (%)||Return (%)||Return (%)|
|ICICI Prudential Tax Plan||23.98||6.86||15.4||25.19||28.83|
|Franklin India Taxshield||22.64||5.48||17.2||23.85||24.19|
|Birla Sun Life Tax Plan||14.61||-3.07||12.43||20.42||23.18|
|Tata Tax Saving||16.39||0.6||12.67||19.19||23.1|
|Birla Sun Life Tax Relief 96||11.81||-3.49||16.36||20.5||21.11|
|Principal Tax Savings||14.52||-10.95||11.66||19.84||20.73|
|Principal Personal Tax Saver||15.49||-3.91||16.5||19.98||20.62|
Performance Comparison: As on 24th Dec 2010
Please note that past performance may or may not be sustained in future.
Points to remember while choosing ELSS Scheme, Short term Returns May be Misguiding so always look for 5-10 year performance of a fund.
Better returns in comparison to other tax saving instruments
Best debt tax saving instrument is PPF – it gives 8% tax free return so let’s compare PPF & ELSS
Current Value of Rs. 70,000 invested on 1 Jan every year from 2000-2010 in PPF and ELSS schemes – Returns as on 30th Nov 2010
ELSS Vs ULIP
Can you compare Sachin Tendulkar with Tatenda Taibu? So how can I compare ULIP with ELSS.
Systematic Investment Plan (SIP) in ELSS
In SIP, you invest a certain amount each month in a fund. It’s an effective way of investing in ELSS as the concept of rupee cost averaging and the power of compounding works well. Even if you have done your tax planning for this year start this from 1st April 2011.
SIP ELSS Performance
- Investment Rs 5000 per month
- Time – Last 74 Months
- Total Investment – Rs 370000
|SCHEME NAME||PRESENT VALUE||Return||PROFIT SIP||PROFIT ONETIME INVESTMENT|
|1||Canara Robeco Equity Taxsaver – Dividend||787503||24.94||417503||1336877|
|2||HDFC Taxsaver – Growth||726664||22.25||356664||1365076|
|3||ICICI Prudential Taxplan – Growth||684921||20.28||314921||1070301|
|4||Sundaram Taxsaver – Growth||683811||20.23||313811||1178489|
|5||HDFC Long Term Advantage Growth||665961||19.35||295961||922003|
|6||SBI Tax Gain Scheme 93 – Growth||661877||19.14||291877||1469557|
|7||Birla Sun Life Tax Relief 96 – Dividend||630300||17.52||260300||825569|
|8||Principal Personal Taxsaver||616625||16.8||246625||807317|
|9||ING Tax Saving Fund – Growth||575719||14.53||205719||728567|
|10||Birla Sun Life Tax Plan – Dividend||572173||14.33||202173||785124|
|11||PRINCIPAL Tax Savings Fund||537488||12.26||167488||687264|
Note: In new Direct Tax Code ELSS is not considered as a tax saving instrument – so use it before it’s actually announced.
Source & Credit: Some of the Data/chart used in the article are taken from NJ India Invest, Mutal Funds India & Value Research.
Always remember “Tax Saving should be result of your Investment planning and not vice versa”
What’s your experience with Equity Linked Savings Scheme??