Equity Linked Saving Schemes (ELSS)

Introduction

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. Investors should compare the tax-saving funds with the other choices before them, including National Savings Certificate (NSC) or Public Provident Fund (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.

There are two new fund offers of ELSS in the market
· HSBC Tax Saver Equity Fund.
· Lotus India Tax Plan.

Avantages 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

Ø The only major disadvantage in investing in the ELSS funds is that they have a lock in period and an investor will not able to redeem his money before three years.
Ø There is no assurance or guarantee of returns

Suitability

An investor, who has a long-term horizon (due to the three year lock in period), is willing to take risk while investing in equity portfolio and has a tax liability to be taken care of.