Monday, March 7, 2011

Equity Linked Savings Scheme

About ELSS:

ELSS means Equity Linked Savings Scheme. ELSS as the name clearly suggests is a savings scheme linked to equity markets.

Key Features of ELSS are:

  • ELSS is a fund with a lock-in period of 3 years.

  • It gives an investor tax benefit

  • Investment has to be for long term, any expectation of short term gains is not appropriate.

  • Involves a little bit of risk because of equity allocation.

  • Exemption from night mares: 

    All investors constantly track SENSEX and NIFTY and judge their investment’s NAV to these returns and try to speculate. But this is not the right way to keep invested in the market. The investor should not be worried about daily ups and downs in the market but should follow the investment philosophy of staying invested for a long term and ELSS helps serving this cause by locking in the money for three years.

    Tax Benefit:

    Upto March’31,2005 an investor could claim only rebate under Section 88 if invested in ELSS and the maximum amount that could be invested in ELSS was only Rs.10,000/-.
    But from March’31,2006 the investment limit in ELSS has been increased to Rs.1,00,000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act,1961.

    Revised Tax Slabs for the FY’10-11:

  • Upto Rs. 1,80,000 - Nil

  • Rs. 1,80,001 to Rs. 3,00,000 - 10%

  • Rs. 3,00,001 to Rs. 5,00,000 - 20%

  • Above Rs. 5,00,000 - 30%

  • Case I: Resident Individual who does not invest in ELSS

    If your income is Rs. 3,00,000 for financial year ending March’31,2009,
    Then, Net taxable income: Rs.3,00,000
    (-) Income exempt : Rs.1,80,000 (upto Rs.1,80,000 NIL)

    Therefore the tax payable is: Rs.12000( 10% tax on Rs.1,80,000)
    (+) Education Cess@3%:Rs.     360

    Case II: Resident Individual invests in ELSS:

    Now if you invest Rs 1,00,000 in ELSS then the taxable income would be:

    Net Taxable income: Rs. 3,00,000
    (-) ELSS investment Rs. 1,00,000
                                 Rs. 2,00,000

    Income exempt from Tax as per slabs: Rs. 1,80,000

    Therefore Tax has to be paid on the amount:
                                             Rs. 2,00,000
                                         (-)Rs. 1,80,000
                                             Rs     20,000

    Tax payable: 10% on Rs.20,000= Rs. 2000
                (+) Education Cess@3%= Rs.   30
                                                     Rs. 2030.

    The above calculation shows a pure saving of Rs.10,330 after ELSS investment (in Case II) as compared to Case I
    Other tax saving schemes also show the same benefits but when it comes down to returns ELSS wins hands down.

    Other tax saving schemes v/s ELSS. And the winner is…..

    Parameter PPf NSC ELSS
    Returns 8% 8% Market linked*
    Interest Receipt On Maturity On Maturity Depends on Performance
    Tenure 15 Years 6 Years Minimum 3 years
    Tax Benefits Sec 80C ,sec10 Sec 80C Sec 80C
    Minimum Investment Rs 500 p.a. Rs 100 Lumpsum: Rs 5000/-
    Maximum Investment Rs 70,000 Rs 1,00,000 No Upper Limit
    Monthly Plans N.A N.A. SIP : Rs. 500/-


    *25%-40% return on an average in last two to three years

    Beneficial to Investors and Fund managers:

    There are certain groups of people who are scared of investments into Equity. But history shows that none of the investors who have put their money into ELSS have lost money and most of the years Tax saver funds have been the front runners in terms of returns to investors.

    In case of plain vanilla open ended equity funds, one can put money today and withdraw tomorrow which makes life of fund manager very difficult but in case of ELSS the fund manager can stay invested even if the sentiment is bearish in short term because of the clause of 3 year lock-in period and take advantage of long term compounding benefit.

    Blessing in Disguise:

    Your invested money is LOCKED for a period of 3 years. i.e., Once invested in a Tax Saver fund, your money cannot be taken out for a period of 3 years. But this is a blessing in disguise, because Tax Saver funds generally yield healthy returns during a 3 year period.


    Persons who are looking for Capital Appreciation and Tax - Benefits amounting to Rs.1,00,000/- must look towards investing through ELSS

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