As we approach the final quarter of this financial year, tax planning is one of the most financial activities for all investors. Ideally, tax planning should be done at the beginning of each financial year but if you have not done it yet, you should do your tax planning now to avoid last minute hassles. Section 80C of Income Tax Act 1961 allows investors to claim deduction of upto Rs 150,000 from taxable income by investing in certain schemes.
Different 80C schemes
There are two types of investment schemes under Section 80C:-
- Non-market linked schemes: These include Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), National Savings Certificates (NSC), 5 year tax saver Bank FDs etc. These schemes have to pay interest as specified by the Government or the scheduled commercial banks. These schemes have low risk since the safety of investment is assured by the Government or the banks.
- Market linked schemes: These include mutual fund Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs). These schemes invest in financial market securities. Both ELSS and ULIP have lock-in periods. The returns of these schemes are market linked. These schemes are subject to market risks.
Equity Linked Saving Schemes
Equity linked savings schemes (ELSS) are tax saving mutual fund schemes. Investments in ELSS are eligible for deductions from your taxable income under Section 80C of Income Tax Act 1961. There is no upper limit on investments in ELSS, but maximum deduction from taxable income is subject to a cap of Rs 150,000 in a financial year as specified in Section 80C.
Equity linked savings schemes are essentially diversified equity mutual fund schemes, which invest across different industry sectors and market capitalization segments. ELSS funds have a lock-in period of 3 years. No redemption or withdrawal is allowed in the lock-in period. After the lock-in period, you can redeem units of your ELSS partially or fully.
You can invest in ELSS either in lump sum or through systematic investment plan (SIP). If you are investing in ELSS through SIP, please note that each SIP instalment will be locked in for 3 years from their respective investment dates. You need to plan your investments accordingly.
The redemption proceeds of your ELSS are subject to long term capital gains tax. Long term capital gains of up to Rs 1 lakh in a financial year is tax free and taxed at 10% (plus applicable surcharge and cess) thereafter. Dividends paid by ELSS are added to taxable income and taxed as per your applicable income tax slab rate.
You may like to read this start your tax planning early: invest in ELSS
Benefits of Equity Linked Savings Schemes
Who should invest in ELSS?
- Investors looking for tax savings and wealth creation over long investment tenures
- Investors with moderately high to high risk appetites
- You should be prepared to remain invested for minimum 3 years. In our view, you should have longer investment tenures for ELSS
Investors should consult with their financial advisors, if ELSS is suitable for their tax planning needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.