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January 22, 2020

Aggressive investors with long horizon can go for ELSS and save taxes

Many Indians ring in the New Year with two actions. One is making resolutions, and the other is examining last-minute investment avenues to save tax, since January marks the advent of the tax-saving season. In this article, we look at how, when compared with traditional tax-saving investments, an equity-linked savings scheme (ELSS) is a better avenue for investors with a long-term horizon and higher risk appetite. However, before we go any further, it is important to make one more resolution: ensure tax savings is a year-round systematic investment affair instead of a last-minute haphazard scramble.


Getting acquainted with ELSS


ELSS are schemes offered by the domestic mutual fund industry that park investor monies in the equity market across market capitalisation, sectors and themes. Investors have to stay invested for a minimum three years to gain the tax breaks. Though there is no upper limit to the amount that can be invested in an ELSS, the maximum sum that can be claimed as tax deduction under section 80 C is limited to Rs 1.5 lakh per financial year as per the current tax provisions. Investors can save taxes up to Rs 15,000, Rs 30,000 and Rs 45,000, respectively, for the tax brackets of 10%, 20% and 30%, excluding cess, for an investment of Rs 1.5 lakh. 


Why ELSS? Because equity maps with India’s demography


Among the various tax-savings options available under section 80C, ELSS is the only one providing pure equity investment. A ULIP (unit-linked insurance plan) is secondary but it bundles insurance, and investors can also choose debt as an investment under the avenue. Second, equity maps with India’s demography, which is among the youngest in the world and will continue to remain so in the foreseeable future. Young investors have long-term investment horizon which maps with an asset class (equity) that can be risky in the short term (details ahead).