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ELSS – Best Tax Saving Tool

As the Indian economy is growing at nine percent per annum that resulted an increase in the income levels of the individuals, the rise in income levels need to do proper tax planning. The financial year 2007-08 is going to end and most of the individuals have started doing their tax planning.  Under section 80C, a deduction of up to Rs.1,00,000 is allowed from Taxable Income in respect of investments made in some specified schemes. This section has been introduced from the Financial Year 2005-06.
Following are some Specified Investment Schemes, by which individuals can do their tax saving:
· Equity Linked Savings Scheme (ELSS)
· Life Insurance Premiums
· Public Provident Fund (PPF)
· National Savings Certificate (NSC)

Among the all tax saving instruments the ELSS is the best investment for saving the tax.

Equity Linked Saving Scheme (ELSS):
The ELSS schemes are tax saving schemes that invest their asset in equities. The ELSS schemes offer a tax rebate to the investors under specific provisions of the Indian Income Tax laws. Investments made in ELSS and pension schemes are allowed as deduction under section 80C of the Income-tax Act, 1961. A sum of up to Rs 1 lakh invested in them during the financial year will qualify as a deduction from the income of the individual. Tax-saving funds are a key part of any portfolio. The act also provides opportunities to investors to save on capital gains. Investments in the ELSS schemes have a lock in period for three years. Such investments, therefore, can work for unit holders for a fairly long time, long enough for the NAVs to appreciate. The returns however are not guaranteed as they ultimately depend on the market. These funds, however being basically equity schemes carry high risk unlike a PPF or a NSC, where your investment grows at a steady pace. With equity funds, you risk losing your capital, let alone not earning a return. But the PPF and the NSC both have a long term lock in period as compared to the ELSS.
Investors should compare the tax-saving funds with the other choices before them, including NSC or PPF etc. However, it is to borne in mind that lock-in period under the scheme is the lowest in the ELSS when compared with the PPF and NSC. While the said schemes are debt oriented in nature, the ELSS schemes are equity oriented in nature and the risk associated with it is also high.

Advantages of investing in an ELSS
Ø Potential for capital appreciation through equity exposure.
Ø Benefits under section 80C of the Income Tax Act.
Ø No tax on Capital Gains for investments made in these schemes.
Ø Dividends are tax free in the hands of the investor.
Ø Shorter lock-in period of 3 years compared to other tax saving instruments.
Ø 3 year lock-in period also has the benefit of minimizing volatility.
Ø Allows regular investments of small amounts through the SIP route.
Ø Historically, equity linked savings schemes have provided better returns as compared to other tax saving instruments over periods greater than 1 year.

Disadvantages of investing in an ELSS
There is no assurance or guarantee of returns

 
Life Insurance Premiums:
Contribution made by an individual for the life insurance, whether in the traditional money back plan or modern ULIP plan qualifies for tax deduction and the minimum lock in period for the ULIP plan is three years but the charges under the ULIP plan is higher than ELSS. Through the maturity amount is tax-free.

Public Provident Fund (PPF):
PPF is the best tool for saving the income tax; it generates compounded eight percent tax-free incomes for the investor. But the only shortcoming in the PPF is that it has a lock in period of 15 years and the maximum amount, which qualifies for the tax deduction is Rs.70000\- only.

National Saving Certificate (NSC):
NSC is a fixed return scheme and provides for tax saving benefit too! Returns are at compounded half yearly 8% for duration of only 6 years. Here, investors are required to make a single deposit and the interest is returned along with the principal amount on maturity. NSC investors enjoy tax saving benefits. But the interest earned through NSC is subject to taxation.

On the whole ELSS is the best investment for getting the tax deduction, whether in terms of lock in period or in terms of returns and the tax-free returns, though investment in the ELSS is little risky. Since tax-saving funds invest in the stock markets, they are prone to high volatility in the short to medium term. In the long-term (over three years), although it is generally stated that the investor will be compensated for the risk he is taking by way of a higher return. It should be understood that there are no guarantees, i.e. there is always the possibility that at the end of the three-year period investors may lose part of their capital, let alone earn a return on it. This may seem like an extreme scenario, but it is not. There are several instances in stock market history where returns have been negative or very low not just for a year or two, but for decades.
In the year 2007, tax saving mutual funds has generated marvelous returns. Most of them have generated a return more than 55 percent for the investors in 2007.  Taurus Libra Taxsheild Fund is on the top in the list with the return of more than 110 percent in 2007 followed by Principal Personal Taxsaver Fund with the return of 85.53 percent.
While investing in the ELSS fund an investor should always opt for the growth or dividend payout. An investor should not opt for the dividend reinvestment option because in this option an investor can never get his money out completely, The dividend, which is automatically reinvested by your fund, amounts to your subscribing for additional units and thus qualifies for fresh deduction. But you need to keep in mind that in an ELSS, a dividend reinvestment would mean locking the fresh amount for another three years from the date of such a receipt.
For example:
You invest 10,000 in ELSS scheme with dividend reinvestment in 2007. (You can redeem these units only after a three-year lock in 2010)
Assume-Dividend of 1000 declared in 2008. The dividend units get added to your kitty by way of reinvestment (these units can only be redeemed in 2011)
Assume -Dividend of 1200 declared in 2009. The dividend units get added to your kitty again (these units can only be redeemed in 2012)…and it goes on like that…so a fraction of your investment can go unredeemable.
So, please stay away from dividend reinvestment option while investing in tax saving ELSS.

There are four new fund offers of ELSS in the market
· Lotus India AGILE Tax Fund
· SBI TAX Advantage Fund
· Reliance Equity Linked Saving Fund
· JM Tax Gain Fund

At last an investor should not put all his eggs in the one basket, he should invest in different asset class for achieving the tax deductions.
Age (Years) Life insurance premium EPF PPF / NSC ELSS Total
< 30  10,000 10,000 20,000 60,000 1,00,000
30 – 45 10,000 20,000 25,000 45,000 1,00,000
45 – 55 10,000 30,000 30,000 30,000 1,00,000
> 55 10,000      –  65,000 25,000 1,00,000
The table above lists an indicative asset-allocation plan for individuals across various age groups. As can be seen, as you grow older, the allocation has to change in favour of the low-risk instruments.