Want to save ₹ 45,000 in tax this year? Here’s how
Who doesn’t like to save tax? And if you can save tax and earn equity-like returns at the same time wouldn’t that be great? That’s where ELSS or equity-linked savings schemes come in.
With ELSS, you can save up to ₹ 45,000 a year in tax if you are in the highest tax bracket.
What’s an ELSS?
An ELSS is just another equity mutual fund with two key differences. Like any other equity mutual fund, an ELSS invests a large portion of its portfolio in equity. But:
1. An ELSS comes with a lock-in period of three years
2. And, more important, it offers tax deductions on investments of up to ₹ 1.5 lakh under 80c of the Income Tax Act.
That’s why ELSS is also called a tax-saving fund.
How can you save tax with ELSS?
To encourage investments, Section 80c of the Income Tax Act allows tax-payers to claim deductions for investments of up to ₹ 1.5 lakh in a wide range of instruments, including fixed deposits, PPF, postal savings and ELSS.
You can invest the amount in one or more of the instruments. For example, you can choose to put the entire ₹ 1.5 lakh in ELSS or you can spread it over across different assets.
The amount you invest under section 80c is reduced from your total taxable income. For example, if your taxable income is ₹ 6,50,000, and you invest ₹ 1.5 lakh in ELSS, then you need to pay tax only on ₹ 5,00,000. If you are in the highest tax slab of 30%, your savings add up to approximately ₹ 45,000 in a year.
Features of ELSS
You can invest in ELSS either through a systematic investment plan (SIP) or lump sum. Take note, however, that each SIP investment in ELSS will have a three-year lock-in
ELSS comes with two options – dividend and growth. Returns from both are taxed differently.
Dividend income from investments in equity schemes are tax-free in the hands of investors, but the mutual fund house pays a 10% equity dividend distribution tax, which reduces your returns
The returns from an ELSS are treated as long-term capital gains since you have held it for over a year. LTCG of up to ₹ 1 lakh are tax-free, and gains of over ₹ 1 lakh are taxed at 10%
This makes ELSS a good choice because it combines equity-like returns with excellent tax-efficiency. What’s more, among the 80c options, ELSS comes with the lowest lock-in period (for example, tax-saving FDs have a 5-year lock in, NSC has a 6-year lock-in and PPF matures after 15 years)
To claim tax benefits, you must invest the entire amount in the financial year. So, if you would like to save tax with ELSS for FY18-19, you must make your investment by March 31, 2019