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.
