Tax planning is the most common long term financial goal and hence, a crucial part of long term investment strategy. For those who are new to tax planning they need to understand that tax planning and investment planning go hand in hand. As long as you continue to generate revenue annually, you will be taxed depending on the tax bracket you fall under. This is why it is better to invest in a tax saving instrument depending on your appetite for risk and tax goal. Although most people prefer conservative tax saving schemes, what they do not realise is these tax saving instruments offer fixed interest rates. Also, in the current economy the interest rates of bank FDs and similar tax saving schemes are constantly on the decline. When you invest in such tax saving schemes, you have to face a lengthy lock-in period which means you cannot liquidate that portfolio anytime soon. Plus, you have to pay lump sum amounts which everyone might not have the time of investment. One might not be even able to fulfil their long term financial goals even if they remained invested for the long run in such conseravativeschemes.
If you carry a moderately high risk appetite and do not mind earning long term capital appreciation and at the same time save tax, then you can consider investing in Equity Linked Savings Scheme (ELSS).
What is Equity Linked Savings Scheme?
ELSS is an open ended mutual fund scheme that comes with a statutory lock-in period of three years and a tax benefit. According to Section 80C of the Indian Income Tax Act, 1961 a tax paying individual can invest up to Rs. 1,50,000 per fiscal year in ELSS funds and bring down their tax liabilities. Since this is an equity oriented mutual fund scheme, investors also have a chance of earning decent capital appreciation by the end of the 3 year lock-in period. Also, this 3 year lock-in period is probably the shortest among other tax saving instruments.
Can ELSS help achieve long term financial goals?
If you are interested in earning long term capital appreciation by investing in ELSS and at the same time save tax, here are some of the things you should keep in mind. Firstly, ELSS doesn’t have an upper limit which means that you can invest more than Rs. 1.5 lakhs. You just can’t claim any amount that exceeds Rs. 1.5 for tax deduction. ELSS fund is an equity mutual funds. Historically equity mutual funds have given returns that outperform those offered by conservative tax saving instruments like bank fixed deposits. So, investors can remain invested even after the lock-in period is over if they wish to earn higher capital gains.
Thanks to introduction of an investment method call SIP (Systematic Investment Plan) it has become possible to invest in ELSS with an investment amountas low as Rs. 500 per month. Investors can target their long term financial goals by starting a SIP in ELSS funds. Once you decide on a monthly investment amount that you are comfortable with, every month on a fixed date the amount is auto debited from your savings account and electronically transferred to the ELSS fund. Investors can target their long term financial goals like building a retirement corpus or buying their dream home building a corpus for their daughter’s destination wedding.
Investors are expected to understand the risks associated by ELSS funds. These are market linked schemes that do not guarantee capital appreciation. Over the short term, you can also lose out on some of your principal investment amount. So, it is better to discuss your tax planning strategy with a financial advisor before investing.
