Equity Linked Savings Scheme (ELSS): Best for Tax-free Earnings

Millions of people in India look out for ways to save tax, and are often overwhelmed with options like insurance policies, the Public Provident Fund (PPF), and several others. Most of these schemes seem attractive to individuals who are willing to wait longer for returns. For those who wish to save tax and earn good returns within a short period of time, they can be a big turn-off. The individuals who do not want to wait for too long to earn their returns can have the best option in the form of an Equity Linked Savings Scheme (ELSS). It not only helps in getting tax benefits, but also offers them a great chance to profit from the equity markets. It qualifies under Section 80C of the Income Tax Act, 1961, for tax exemption; and at the same time, gives investors the double advantage of tax-savings and value appreciation. An ELSS also carries the following benefits:

Equity growth potential: As it is evident from its name, an Equity Linked Savings Scheme invests a major portion of the fund in equity markets and products associated with it. This increases the earning potential of the investors, as there is a corresponding increase in return with the profit that the fund makes from equity markets.

No tax on dividends: Dividends that investors receive under the ELSS are exempted from income tax. Upon choosing the option of dividends, the ELSS investors get their share of profit earned by the fund on a particular date. They can also prefer the option of dividend reinvestment, in which, the dividends declared are reinvested on the investor's behalf.

Tax exemption on long-term capital gains: If an investor chooses the growth option in ELSS, the Net Asset Value (NAV) of the fund increases with the profit that it earns. The investor does not earn any dividend during the lock-in period of the fund, but he or she can have long-term capital gains that are exempted from tax upon selling the holdings.

Lowest lock-in period: This is a major benefit of an Equity Linked Savings Scheme as compared to the other tax saving schemes. An ELSS has a lock-in period of three years, while it is fifteen years in case of Public Provident Fund (PPF) and six years in case of National Savings Certificate.

While it is true that the returns in ELSS are based on the performance of the equity markets, it also gives the flexibility of monthly investments through Systematic Investment Plan (SIP). A minimum investment specified in the scheme can be made every month on a pre-decided date, which makes it an attractive investment scheme to the small investors. Under the Income Tax Act of 1961, an individual can avail a deduction of up to one lakh rupees from the Gross Total Income for the investment made in an Equity Linked Savings Scheme. Owing to such attractive benefits, the ELSS is gradually becoming a preferred option for investment among many individuals in India, and the numbers are bound to increase in the years to come.

Tax Benefits related to Research & Development expenses under Income Tax Act

Research and Development is one of the most important contributors to the growth of the company. It’s because of such continuous research and development, ISRO was able to successfully undertake Mars Orbiter Mission, aka “MangalYaan.” Indian Government has always appreciated and encouraged people to undertake research and development in their business.

Encouragement is not just by words but by providing special provisions under Section 35 of Income Tax Act. The special provision states that expenditure incurred for the research and development by the businesses can be deducted while calculating the Income tax.

We will help you understand what actually Section 35 of the Income Tax Act is all about

Deduction under section 35 of income tax act has specifically been provided for people who are engaged in research and development related to the businesses. Such involvement in scientific research may be directly or indirectly

·         Direct involvement includes incurring expenditure on own research and development process.

·         Indirect involvement includes making contributions or donations made to universities or institutions conducting research programs.

Direct Involvement

Deduction is allowed for

1.       Research & Development expenditure before commencement of business

2.       Research & Development expenditure during the running of business

Expenditure before commencement of business includes-

         i.            Revenue expenditure [Section 35(1)(i)]

Revenue expenditure is allowed as deductions only if such research is directly related to business and the amount allowed as deduction include any expenditure related to research including raw materials cost & wages paid incurred within 3 years prior to the commencement of the business in the year which the business commences

       ii.            Capital expenditure [Section 35(2)(ia)]

Even capital expenditure is allowable as deduction only if the research and development is related to the business. However it doesn’t matter if the asset is used for the said purpose within the previous year. Expenditure incurred within 3 years prior to the commencement of the business is allowed as deduction in the year which the business commences.

Other important point is to note that any purchase and acquisition of land is not allowed as deductions under this section. Also, no separate deduction for depreciation is allowed

Expenditure during the running of business include

i.            In house research expenditure [Section 35(2AB)]

a)      In-house research expenditure can be allowed as deduction if the organization has an in-house facility for research and development.

b)      Allowable deductions include all expenditure which is directly related to research and development.

c)       To avail these deductions, company setting up research centers must be involved in manufacturing or production of computers or drugs or any product as notified by the Central Board of Direct Taxes.

d)      Only expenditures recognized as related to scientific research under section 35 (2AB) can be claimed for deductions.

e)      Research and development work should be related to scientific research only.

The business centres conducting in-house R&D have to fulfill below mentioned conditions to claim income tax deduction under section 35 of Income tax Act for expenditure on scientific research

Ø  Should be approved by DSIR

Ø  Should be exclusively conducting scientific research in the areas or products as notified by Central Board of Direct Taxes (These notified areas include drugs, pharmaceuticals, electronic equipments, computers, chemicals etc.)

Ø  Research centre must be located in a separate area provided exclusively for R & D.

Ø  Must have separate manpower

The total deduction available under this section is two times the amount of expenditure incurred on the research and development activity.

Indirect involvement -

Any contributions or expenses incurred by business to any approved scientific research association or universities or institutions. It shall be allowed weighted deduction of 125% of the expenses incurred or contribution made under Section 35(1)(ii)/(iii), Section 35(2)(iia) and Section 35(2AA)

Conditions to claim Deduction under section 35(1) (ii)/ (iii)

·         Deduction allowed is only for revenue expenditure.

·         The payment is made to the approved organization, universities, institutions or associations.

·         The main objective of the organization or association to which contribution is made should either be scientific research or research for social sciences.

·         Purpose of scientific research or research for social sciences may or may not be related to the business. Also, it need not be approved by any authority.

·         125% deduction shall be allowed as deduction for the amount of revenue expenditure incurred for the purpose of research.

Conditions to claim Deduction under section 35(1) (iia) of Income Tax Act

·         Deduction allowed is only for capital expenditure.

·         The payment is made to the approved organizations, universities, institutions or associations are registered in India.

·         The main objective of the organization or association to which contribution is made should either be scientific research or research for social sciences.

·         Purpose of scientific research or research for social sciences may or may not be related to the business. Also, it need not be approved by any authority.

·         125% deduction shall be allowed as deduction for the amount of capital expenditure incurred for the purpose of research.

  Deduction under section 35(2AA)

Deduction is allowed if the payment is made to the below notified institutions:

·         National Laboratory

·         Universities

·         Indian Institute of Technology

·         Specified persons as approved by the prescribed authority

One has to make sure that the contributed amounts are used for scientific research approved by prescribed authority.

The organizations, universities, institutions or associations approved under section 35 of Income Tax Act for receiving contributions are required to file their return of income under section 139(4).

Any unabsorbed expenditure can be carried forward to set off with the further income for an infinite period of time. By such provisions business houses are motivated to invest heavily in Research and Development which in turn helps humanity with latest technologies.