Over the past 75 years since independence, the participation of average Indians in the stock market has remained meager.
In a nation of 1.3 billion, no more than 20 million, or about 1.5%, invests in stocks.
As there is a very high propensity to save among Indians, it was no longer possible for banks to receive FDs to the tune of lakhs of crores every year.
Note that for several decades the FDs have returned risk-free interest of about 5% annually. That level of return is impossible to sustain for an economy growing at a rapid clip.
Equity Linked Savings Scheme, or ELSS as it is often called, is meant as an on-ramp into the world of stock market investments.
What is ELSS?
Section 80C of the Indian Income Tax Act of 1961, allows a deduction of ₹ 1.5 lakhs for PPF, NSC, tax-saving fixed deposits, post office deposits, and unit-linked insurance plans or ULIPs.
In recent years the 80C deductions have been extended to Equity Linked Savings Scheme.
ELSS funds are able to provide you with savings of ₹ 150,000. Moreover, the income that is earned is taxed as Long-Term Capital Gains at the end of three years and carries a tax rate of 10%.
What are the key features of ELSS funds?
- At least 80% of the funds under management have to be invested in equities or instruments related to equities.
- There is diversification across various sectors such as pharma, technology, infrastructure to minimize the risk of investing.
- The investment has to be at least for three years. There is no upper ceiling.
- There is no minimum or maximum amount that can be invested. However, only ₹ 150,000 is tax-exempt.
- The income from the sale of ELSS units is taxed at prevailing LTCG rates.
What are the benefits of Equity-Linked Saving Schemes?
- High Returns – Some of the funds, such as Canara Robeco Equity Tax Saver, have provided almost 7.8% over the past five years. Of course, past performance is no guarantee of future returns, but you get a higher return than with FDs.
- Liquidity – After the lock-in period of 36 months, you can redeem it when you want. This is quite hard to do with PPF and NSC. The liquidity allows ease of withdrawal in times of emergency.
- SIP – Systematic Investment Plan is offered by all ELSS funds. You save a certain amount every month and transfer it to the fund. This is as low as ₹ 500 for most funds and puts it within reach of every small investor.
Types of ELSS
Growth – If you wish, then the annual dividend would not be credited to you but added back as investment units. As an investor, you could redeem all or part of it at any time but would not receive an annual income in hand.
Dividend –Under this option, the yearly dividend is credited to you, and other than the worth in NAV, there is no expansion of your holdings. If you are a pensioner or senior citizen, the divided option works best.
Should you buy it?
Considering the bullish nature of the Indian stock market and the very low lock-in period of 36 months, ELSS is very appealing.
You have to understand that the performance varies widely, and some funds show returns of as low as 4%.
As usual, with all investments linked to the stock market, you require to carry out due diligence and have at least a basic understanding of how your funds are being managed. That being said, it is easy, safe, efficient and most of all saves you a huge tax burden due to 80C benefits.
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