personal finance

Don’t wait until March to invest for saving tax

Many financial planners are asking investors to plan their tax savings early this year instead of waiting till January when the office asks for proofs of investments. You can start investing up to Rs 1.5 lakh right now using lumpsum, SIP or STP in equity linked savings scheme (ELSS) to save tax under Section 80C of the Income Tax Act.

What are tax saving or ELSS schemes? How much can one invest in them?

These schemes invest in equities and investors can choose between the dividend option or growth option. You can invest any amount upto Rs 1.5 lakh in an ELSS in a financial year to save tax. As they invest in equities they offer the opportunity to earn higher returns over the long run.

How can one invest in such a mutual fund scheme?
Once an investor is KYC compliant, he can invest in an ELSS just like any other mutual fund scheme. Investment can be done by filling the relevant form of the fund house by writing a cheque or through online fund house websites and through third party online portals. Since there is time till March to complete this investment investors can also use the systematic investment plan (SIP) or Systematic Transfer Plan (STP) to invest. This will help you stagger your investment and give you the benefit of rupee cost averaging.

What advantage does ELSS schemes have over other options under Section 80C?
Amongst all tax-saving schemes, ELSS has the shortest lock-in period of three years. Compared to this the Public Provident Fund (PPF) has a minimum lock-in of 15 years, and allows only conditional withdrawal before that. The Employee Provident Fund is usually locked in for the term of your employment. Other tax saving products like Tax-saving Fixed Deposits, or the National Savings Certificate (NSC) are locked in for a period of five years and above. The National Pension Scheme (NPS) is locked in until you reach 60 years of age, and only allows conditional withdrawal. ELSS schemes also offer you dividend option, wherein as and when the scheme declares a dividend you can get intermittent cash flows.

Does one need to withdraw the funds once the three year lock- in period is over?

Investors have the option to continue to hold the mutual fund units after three years or redeem them if they require the funds. Wealth managers feel investors should consider ELSS as a part of their equity allocation and can continue to hold the scheme if it performs in line with their expectations as it would help them meet their financial goals.


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