Hello friends, welcome to today’s podcast by Angel Broking.
Let’s start by hearing Aditi’s story. Aditi is a hardworking consultant who loves to travel to unwind from her demanding schedule. After her last vacation to Thailand, she decided that she wanted to do a tour of Asia. She began saving towards it and in 5 years, she was ready to take a short sabbatical from her job for a vacation. She visited 12 countries over 6 months including visits to Malaysia, Japan, South Korea and Vietnam. Her friends and colleagues ask her how she was able to afford the vacation as well as leave from work. Her answer is always the same that she is able to finance her travel plans by investing smartly. Over the 5 years, she invested in multiple financial instruments. She planned her taxes. By doing so, she was able to get the maximum deductions possible from her taxable income. She then invested the money in more instruments, hence creating a steady fund over time.
Tax planning was crucial to Aditi’s plan. By optimizing the amount of taxes you pay every year, you can save more of your money for spending and investing.
The section 80C of the Income Tax Act, 1961 is very significant when it comes to tax planning in India. Under this section, you can avail tax exemptions on investments of upto Rupees 1.5 lakhs in a year. Section 80 C underlines many schemes that you can invest in to receive tax benefits. Some of these include PPF, NSC, 5-year fixed deposits, amongst others. Investing in the right schemes and saving tax every year can steadily help you build wealth.
These schemes often have a lock-in period. Of all the schemes listed under 80C, Equity Linked Savings Scheme (ELSS) has the smallest lock-in period of only 3 years. Today we will be discussing ELSS- what it is and how it can help you build your investment corpus.
So, what is an Equity Linked Savings Scheme (ELSS)?
An ELSS is essentially a market-linked mutual fund scheme with investments in equities. The investments are diverse and include large, mid and small cap equities. The interest earned on ELSS is tax-free. It is also compounded annually.
If you wish to invest in an ELSS, you can set up a monthly SIP or invest lump sum.
ELSS has many advantages.
Aditi invested at least 1.5 lakhs in ELSS every year, and gained tax benefit of upto rupees 46,800 each year. It is the maximum amount that is eligible for tax deductions for ELSS under 80C.
Having a short lock-in period of 3 years makes it more liquid than tax saving investments like a 15-year PPF or a 5-year fixed deposit.
Because ELSS is market-linked, and the returns are not fixed as they are in PPF and NSC. This creates potential for greater wealth generation on a medium to long-term horizon.
ELSS have low tax rates of only 10% on Long term capital gains of more than rupees 1 lakh. Gains of upto rupees one lakh are exempt from tax.
Aditi had the option of investing in an ELSS in a few different ways.
First was the dividends option, where she could get returns in the form of dividends. These dividends would be given out only when the company gained a surplus. Dividends are always tax-free.
Second was the growth option. By opting for the growth option, Aditi would not receive any dividends. She would get returns only after the lock-in period. As the interest gets compounded annually, the sum grows over time.
Her third option was to reinvest the returns earned on the investment to add to the Net Asset Value (NAV). The Net Asset Value of a fund is the market value of each unit of the fund. It is the price which is known as dividend reinstatement. If a fund is performing well, investors often favour choosing this option.
ELSS does sound like a viable investment, doesn’t it? To choose the right one, remember to compare various parameters of different funds and choose the right one for you. No portfolio is made out of a cookie cutter. An investment that suits you depends on your personal financial goals, your appetite for risk and the time horizon for which you want to invest.
That’s all about ELSS. To find out more about investment schemes that can help you on your journey to build wealth, visit www.angelbroking.com right away!.
As usual, happy investing!