The key is to choose the right investment that will grow well without taking undue risks. For major needs in the distant future, investment in equities usually works well. Over long periods i.e. 8-10 years or more, they typically provide better returns. For instance, stock market benchmark index, S&P BSE-Sensex*, broadly representing the equity market, has given an annual return of 15% in last 15 years from year end of 2001 to year end of 2016.
Equities also work on the tax front. Investments of more than one year are free of any tax on capital gains.But how does an individual investor with limited time and knowledge invest in equities without it being a stressful and taxing effort? Fortunately, there is the effective option of equity investing through systematic investment plans (SIP) in tax saving schemes offered by mutual funds called equity linked savings scheme (“ELSS”). Not only is there no tax on capital gains made for investments older than one year, but you also get annual tax deduction of Rs 1.5 lakh under Section 80C in the year of investment.
Like other mutual funds that invest money pooled from investors in equities, or equity funds, ELSS is also an equity scheme with a lock-in period of 3 years from the date of allotment. Among its two defining characteristics are annual tax deduction of up to Rs 1.5 lakh under Section 80C and a three year lock-in for every investment you make. Systematic Investment Plans (SIP) offered by mutual funds allows investors to invest a pre-decided amount regularly in a scheme of their choice. Therefore, when an ELSS investor opts for SIP, he or she gets to invest regularly, typically every month, in an ELSS of his or her choice. How does this make the tax- saving investments less taxing? The key are three investment stress-busters in ELSS.
Investment Stress-Buster #1: Auto-combats Inflation
If you are not mindful of the tax you are liable to pay on your investments, you might be priming yourself to save less. Remember, you need to pay tax according to your applicable tax slab. That could be a lot if you are in the highest tax slab of 30%. This is typically what happens in case of the traditional instruments—both tax-saving and regular ones.
The threat to the growth of your investment from taxes is a visible threat. But what about the formidable invisible threat of inflation?In the last 10 years, the average annual retail inflation rate has been about 8.51% #. Return after tax for fixed deposits typically trail way behind inflation. Therefore, it is important for your tax saving investment to pull ahead of inflation when it comes to returns after tax.
Birla Sun Life Tax Relief 96’ is one such ELSS scheme. It has delivered 10.82% return ## since its inception on 6 March, 2008.Thus, ELSS seeks to relieve you of the stress of combating inflation and aims to make your money grow.
Investment Stress-Buster #2: Auto-Investment Management
Another feature about ELSS is that you don’t have to break into a sweat while making investments. Expert fund managers do the hard work for you. When you have an SIP in an ELSS, you go one better. A fixed amount of monthly investment ensures that units are bought according to the prevailing net asset value (NAV). So, more units are bought when the markets are low and lesser numbers when the market is high. Consequently, over time, the average cost of a unit remains low. As the NAV increases over time, you start making substantial gains.
Investment Stress-Buster #3: Tax Saving on Auto-Pilot
When you opt for a SIP in an ELSS, your regular investments for growth and tax saving efforts go hand in hand. The last minute scramble for making tax saving investments at the end of the financial year becomes unnecessary. It usually minimizes the chances of making a bad choice in a hurry. If you earmark your ELSS investments for major future needs like child’s higher education, you can get a clear sense of your progress towards those financial goals. ELSS through SIP route has an edge over other tax saving investments too.
For many people, tax saving investments can be a source of great stress. They need not be that way. With an SIP in a well-performing ELSS, you can easily make tax-saving investment less taxing and still manage to have savings.
For further details on the scheme, investors can refer to Scheme Information Document and Key Information Memorandum on the website of the Fund. Click here
# Average annual inflation in CPI IW 2006-2015 http://labourbureau.nic.in/indtab.pdf
## As per past performance, please Click here to know more
Click Here to know the performance of the schemes and other schemes managed by the fund manager.
Tax saving of Rs. 53,303 is calculated assuming qualifying amount of deduction is Rs. 1.50 Lakh and the investor falls in the top income slab of 30% and includes the applicable cess. 12% surcharge is also taken into account which is applicable if the income of the investor is over Rs. 1 Crore.
Investors are advised to consult their tax advisor in view of individual nature of tax benefits. Investors are requested to note that fiscal laws may change from time to time and there can be no guarantee that the current tax position may continue in the future.
Note: The comparison of ELSS Vs other traditional savings instruments has been given for the purpose of the general information only. Investment in ELSS carry higher risk, does not guarantee returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. Birla Sun Life Mutual Fund / Birla Sun Life Asset Management Company Limited will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully