Start your tax planning early: Invest in ELSS

Tax planning is one of the most important aspects of financial planning. Tax payers should correctly disclose all income including income from assets e.g. rental income from house property, interest income from bank FDs, capital gains and dividends from mutual funds etc in their income tax returns (ITR) and pay taxes accordingly. Tax payers are also allowed to claim tax deductions under various sections of Income Tax Act. Section 80C of Income Tax Act 1961 allows tax payers in old tax regime to claim deduction of up to Rs 150,000 from their taxable income by investing in eligible tax saving schemes.

Benefits of tax planning

• Tax savings: Paying the correct income tax amount is the responsibility of every tax-paying citizen. The tax laws of the Government have several provisions (e.g. Section 80C, Section 80D etc) under which you can save taxes. Less tax means more money in your hands. Over a period time, it can result in substantial financial benefits. For example, under Section 80C you can save up to Rs 46,800 in taxes every year. Over a 30 – 35 year working career tax savings can amount to a significant corpus due to power of compounding.


• Inculcate savings habit: Maximizing tax savings requires planning, disciplined savings and investing habit. Money not saved is often spent on unproductive discretionary expenses. Disciplined savings habit is essential for achieving different life-stage goals and a happy retirement.


• Wealth creation in the long term: Tax savings investments if chosen wisely have significant wealth creation potential in the long term. Mutual fund Equity Linked Savings Schemes (ELSS) invests in a diversified portfolio of stocks across different industry sectors and market cap segments. Equity as an asset class has the potential of creating wealth over long investment horizons.

Why should you start tax planning early in the year?

It has been seen that many tax payers start their tax planning very late in the financial year and these leads to last minute scrambling to make their tax saving (80C) investments. You should do your tax planning early in the financial year for the following reasons.

• Maximize tax savings: If you begin your tax planning early, you know how much to save for your 80C investments early in the year. You can plan your expenses better so that you can avail full benefits of 80C tax savings. If you start your tax planning late in the year and do not have sufficient savings, you may have to pay more taxes.


• Avoid large tax outgo in the last quarter: For salaried people, most companies deduct tax in the last quarter of the financial year after accounting for all the deductions. If you are unable to avail the deductions, there will be a large tax outgo in the last quarter which may leave you with less money in hand for your regular expenses and savings.


• Make informed investment decision according to your risk appetite: There are several eligible schemes for 80C tax savings with different risk return characteristics. The returns of different 80C schemes over long investment horizons can be substantially different. You should evaluate your risk appetite, financial goals and make informed investment decisions. You should consult with your financial advisor if required.


• Get chance to earn higher returns: The longer your money remains invested, higher is your return. If you invest early in the year you can potentially get higher returns because you get interest or return for the entire year.


• Link tax planning with financial goals: Tax planning should not be just about saving taxes. You can also link tax planning with different financial goals so that you can get twin benefits of both tax savings and also meeting your financial goals.

Equity Linked Savings Schemes

Equity Linked Savings Schemes or ELSS funds are equity mutual fund schemes which are eligible for tax savings under Section 80C of Income Tax Act 1961 in the old income tax regime. ELSS funds have a lock-in period of 3 years. You can invest in ELSS either in lump sum or through Systematic Investment Plans. If you are investing in ELSS through SIP, each SIP instalment will be locked in for 3 years.

Why invest in ELSS?

• Historical data shows that equity as an asset class has the potential of creating wealth for investors in the long term.


• Investing in ELSS from your regular savings through SIP can keep you disciplined in tax planning and ensure maximum tax savings as well as wealth creation in the long term through the power of compounding.


• ELSS is one of the most liquid 80C investments in the long term with lock-in period of just 3 years.


• Capital gains arising out of your ELSS investments are subject to long term capital gains taxation. Long term capital gains from listed equity share , unit equity oriented mutual fund (incl ELSS) and unit of business trust of up to Rs 1 lakh every year is tax exempt and taxed at 10% thereafter.

Conclusion

We are in the final quarter of the current financial year. If you have not made your tax savings investments for the year, you should make it as soon as possible to avail all the tax benefits. As part of your New Year resolution, make tax planning a priority and begin tax savings early in the year. Investors with moderately high to high risk appetite can consider ELSS for their tax savings investment. Investors should consult with their financial advisors to understand different tax savings investments and make informed investment decisions.

Past performance may or may not be sustained in the future.