www.arihantcapital.com

SMART GUIDE ONTAX SAVINGS

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ELSS - Smart Guide onTax Savings

These days a lot of times, people end up lowering their

net income by paying higher taxes. This usually happens

because of improper planning, paucity of time and

deferring tax planning to last minute deadlines when the

HR calls for submission of tax papers. People often fail to

realise that tax planning is not a one time last minute

activity but a continuous one. Usually, because of being

unaware about tax saving investment avenues, people

often chose traditional avenues of tax saving instruments

like FD, PPF without even realising that better options are

available in market.

At Arihant, we want to make sure that you make the right investment decisions even concerning

your tax investments. We understand that selecting the right plan or mutual fund scheme can be an

intricate task. That is why we understand your needs first and then recommend the best investment

plan and scheme for you.

What is ELSS?

ELSS or equity linked savings schemes are tax saving mutual fund investments which invest majority

of their corpus in equity and equity related instruments. ELSS is the only option under Section 80C

which allows you to reap the benefits of the returns generated by the equity markets and at the same

time offer complete tax shield at the lowest cost possible.

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With mutual fund ELSS schemes, planning

your tax saving investments becomes

much easier and convenient. ELSS is built

to offer benefits of capital appreciation

based on equity gains and tax benefits to

investors. Not just that, a third benefit of

investing in these schemes is that the long

term capital gains made through these

investments are exempted from tax.

ELSS Tax Benefits

With only 3 years lock-in period, a host of tax benefits

coupled with the opportunity to earn high returns,

ELSS is one of the best tax saving investment

avenues you must invest in.

ELSS enjoys the triple tax advantage. The amount

invested in ELSS up to the limit of Rs. 1.5 lakh is

exempt under Section 80C. ELSS funds are equity

oriented and dividend income and the long-term

capital gains on them are exempt from tax thus

making the maturity proceeds entirely tax-free for an

investor.

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Whereas, in case of tax-saving FDs, post office FDs and

NSC the interest earned is taxable as per your income tax

slab; investments in NPS and pension plans are taxed at the

time of maturity. Insurance is also an EEE (exempt-exempt-

exempt) investment but it is not a pure investment product.

Though PPF enjoys the EEE benefit like ELSS, investments

in PPF are extremely illiquid with the highest lock-in period.

Equity Linked Savings Schemes offer more liquidity

compared to most tax saving (Section 80C) investment

options. If you are investing in ELSS through SIP, each SIP

instalment will be locked- in for three years. The dividend

option of Equity Linked Savings Schemes (ELSS) provides

investors with the option of getting tax free income from their

ELSS investment during the lock-in period and beyond.

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Mistakes people make while investing in ELSS

There are some common mistakes that are generally made by an investor seeking to invest in ELSS

Beginning late01

People generally start investing in ELSS

towards the end of the financial year when the

time for showing investment proof comes

close. We believe this is not an ideal strategy as

it could not only lead to cash flow mismatch

problems but also may result in high cost of

investment due to unfavourable market

conditions.

New fund every financial year02

Another common mistake while investing in

ELSS is opting for a new fund every year.

Investors many times get swayed by recent

performance of a fund and invest in the top

performer of the year. However, there are many

disadvantages of this approach, one is that it

results in a portfolio which has many funds of the

same category which results in difficulty in

tracking and managing the portfolio, the other

issue is that the approach of selecting a fund by

its recent performance is faulty and a fund can

always be selected on the basis of consistent

performance.

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Switching funds every three

years or withdrawing

03

Since ELSS have a lock-in of 3 years, people

think that they should redeem their investment

in ELSS once it completes the lock-in period.

However, ELSS is an Equity mutual fund and an

ideal time horizon for equity funds is at least 5

years. Once 3 years complete of an ELSS fund,

its performance should be evaluated and the

decision to redeem or continue should be taken

based on the same.

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Choosing between Dividend and Growth Plans04

Investing in ELSS should be ideally done under an individual's investment priority basis i.e whether

to chose growth plan or dividend plan. Since ELSS is a long-term investment it is always beneficial to

opt for growth option as it brings in additional compounding benefit. Since the dividends are not re-

invested but paid out under dividend plan, the dividends are not available for compounding thereby

resulting in lower returns over the long-term.

??DividendGrowth

Unclear about fund category05

Companies design their ELSS funds based on a combination of large, mid and small-cap

companies. Thus, depending on the share of each of the category, the risk and return profile vary for

each ELSS funds. The large cap oriented ELSS funds are safer than mid cap and small cap oriented

which are more volatile. Investors should ideally understand the category in which they are investing

and make an informed decision based on how much risk they can take and their horizon of

investment.

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Selecting funds based

on current performance

06

Investors generally tend to see the returns for one-year period

and sort the funds based on returns over these periods.

Sustainability & consistency of returns is more important than

short term high returns. We believe an investor should focus on

funds which offer consistent returns over a long term`

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Best performing ELSS schemes

ELSS Scheme Name 3 YearsReturns

AmountInvested

Fund ValueAfter 3 Years

ELSS Scheme Name 3 YearsReturns

AmountInvested

Fund ValueAfter 3 Years

Reliance Tax Saver Fund 14.41% 150000 171615

DSP BR Tax saver Fund 17.05% 150000 175575

Birla Tax Relief 96 18.11% 150000 177165

Motilal Oswal Long Term Fund 22.15% 150000 183225

IDFC Tax Advantage Fund 18.76% 150000 178140

ELSS vs. PPF vs. NSC vs. Tax Saving FD:

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%ELSS PPF NSC 5 Years FD EPF

7.9% 7.8% 6-7.5%8%

18.2%

Lock-in Period3years

Lock-in Period5 years

Lock-in Period5 years

Lock-in PeriodRetirement age

ELSS Funds are thebest bet for beating

inflation

Lock-in Period15 years

Tax savings investment avenues

Returns

Despite lower lock in period, ELSS gives high returns and is one of the best ways to save taxes.

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