The ELSS route to tax saving
The countdown to the financial year end is on. Typically, manytax payers still availing of the older tax regimewill nowscramble to complete their Tax saving investments. There are multiple options on offer but the sole pure equity option on offer in this category is the Equity Linked Saving Scheme (ELSS) offered by Mutual Fund houses.
The Unit Linked Insurance Plan (ULIP) product offered by Insurance companies is another popular option, where the lock in is restricted to 5 years though ideally one should hold it for longer tenure to optimize returns. In case of ULIPs, the investor also has the advantage of two way fungiblity between Equity and Debt.
Foralmost all the remaining Tax Saving instruments, including the Tax Saving Bank Deposits, the underlying investment vehicle is debt andthe minimum lock-in period is at least 5 years,with some having even longer holding tenures.
Of such investment options, the Public Provident Fund (PPF), remains the most popular tax saving debt based investment for those averse to equity. The lock-in period is 5 times longer than ELSS, though the returns unlike ELSS are still tax-free.
More often than not, when one looks at the relative 3 year performance of the ELSS as compared to its alternative tax saving instruments, it has been superior. The reason of focusing on 3 year returns here is simply because the lock-in period for ELSS is 3 years which makes it the shortest tenure tax saving instrument.
Besides its plus points of being the only tax saving instrument where the underlying asset class is equity and its being locked in for just 3 years, there is another unique feature that the ELSS offers investors.
Once the funds complete 3 years of investment, the same can be redeemed and reinvested without having to bother about a fresh infusion of funds to save taxes.Hence, the outflows can be restricted to three years and thereafter, the funds can be rolled over if needed, thus not impacting a tax payers liquidity.
This of course must be accompanied by the caveat that there is an underlying assumption of there being at least a status quo in the sum invested if not appreciation. But, like I mentioned before, historical evidence suggests that it is the case, more often than not. It must be noted though that such a fund rollover will unfortunately attract Capital Gains Tax on the profit made.
While discussing ELSS with anyone, I have often made the point that investors in ELSS would do well to consider completing it during the early part of the year so that their compounding tenure increases.Alternatively, one could plan it as an SIP and let it run on auto-pilot for at least 3 years.
Finally, one must choose their tax saving investment based on their Risk appetite. For younger investors with a taxable income and relatively higher Risk Appetite, ELSS could be an optimal option.
(Ashok Kumar heads LKW India and can be contacted at ceolotus@hotmail.comThe views expressed here are his personal views)