Tax planning is one of the most important aspects of earning. If your income falls in the taxation bracket, then you might be searching for avenues to save tax. The people go for government supported schemes like PPF (Personal Provident Fund), NSC (National Saving Certificate), etc. Numerous clients are unaware of the tax saving schemes provided by mutual funds. The customers think mutual funds to be just a method of capital appreciation. But, there are more than one benefits associated with the tax-efficient schemes of mutual fund.
As per the taxation policy of our country, any citizen whose annual income exceeds Rs. 2.5 lac is liable to pay Income Tax according to the applicable tax slab. But, the Section 80C provides an opportunity to save tax by investing in plans that are termed as tax savers. Equity Linked Saving Scheme popularly known as ELSS is one of the most tax-friendly plans available under mutual funds. ELSS extends taxation benefits under the Section 80C of Income Tax Act.
Rajesh, who is a bank employee, invested in PPF until his friend told him about the ELSS mutual fund. After discussing the benefits of the scheme, Rajesh went to a financial expert to seek his advice. His annual income is Rs. 4 lac. So, after deducting the non-taxable income, i.e., Rs. 2.5 lac, a sum of Rs. 1.5 lac remains on which he has to pay tax. Earlier, he used to deposit the entire amount in his PPF account. But, now as per the guidance of the advisor he has split his amount between PPF and ELSS scheme. This means he invests Rs. 50,000 in PPF and Rs. 1 lac in ELSS mutual fund.
Philosophy governing ELSS mutual fund
ELSS scheme not only aims at saving tax but also provides capital appreciation. The traditional tax efficient schemes are just like savings in a bank account with an increased rate of interest. Along with the meager rate of interest, PPF restricts the withdrawal of money for a prolonged duration. This means a person depositing in PPF account cannot withdraw the amount before the span of 15 years although partial withdrawal is possible after 6 years.
ELSS mutual fund has Overshaded all the drawbacks of the age-old tax saving methods and has become one the most preferred plan. It not only saves tax but also multiplies the riches of the investors by putting the money in equity-oriented schemes. By providing relaxation on tax, it also facilitates tax-free capital gains. This means that the capital gains generated from the investment in equity-oriented schemes are termed as long-term capital gains, and the client is not required to pay any tax over these. The lock-in period of the scheme is three years which is quite less as compared to the partial withdrawal period of PPF. The client is eligible to withdraw the entire amount invested in ELSS scheme after the lock-in period. Under ELSS mutual fund the investors get two options viz, growth and dividend. The growth option provides lump sum amount at the end of three years including the invested sum as well as the profits. On the contrary, the dividend option shares the profit with the investors at regular intervals known as dividend. Thus, it is entirely dependent on the client’s preference that which option is suitable for him/her.
Nucleus of ELSS mutual fund
The underlining feature of ELSS is the twin advantage of tax saving and corpus formation. The client need not invest separately for two different requirements. ELSS invests 65% in the stocks of listed companies and provides capital gains that are in turn tax-free. With a return rate of 12-15%, ELSS mutual fund has become a chart-buster scheme.
Some of the best ELSS schemes
Numerous mutual fund companies provide ELSS fund to their clients. But, some of the ELSS plans have shown unparalleled success regarding returns and performance as well.
- Birla Tax Relief 96: Birla Sunlife mutual fund has launched this ELSS fund to providing the best possible solution to the clients for tax saving purpose. The scheme invests in scripts following a diversified portfolio. It jointly invests in large-cap, mid-cap and small-cap shares to manage the risk factor as well as to average the profits. The fund was launched in the year 1995 and has been one of the top performing ELSS funds in India.
- Axis Long Term Equity Fund: This ELSS fund was initiated in the year 2009 by Axis mutual fund. Within a short span of 7 years, the fund has shown massive success and has reached the zenith. The clients invest in the scheme without fearing the loss as their investment is managed by skilled fund managers. The money of investors under this ELSS scheme is evenly distributed among sectors like banking, pharmaceuticals, finance, etc.
These are only two examples of the best performing ELSS funds. There are more like Reliance Tax Saver Fund, which is the best pick under the ELSS mutual fund category. Hence, you can also select one of these and utilize the tax benefits along with growth.