How to save tax through ELSS

What is an ELSS

1. Equity Linked Saving Scheme is the only mutual fund available for deduction under section 80C.

2. As the name says, it’s an equity fund, but it has a 3 year lock in period, where as a normal equity fund, just has 1 year lock in period.

3. The maximum amount that one can claim under section 80C is Rs. 150000/-.

Tax Slabs as per 2016 for Individuals

Income Tax Slab (in Rs.) TAX

0 – 250000 NIL

250001 - 500000 10%

500001 - 1000000 20%

Above 1000001 30%

Tax Slabs as per 2016 for Individuals above 60 years of age

Income Tax Slab (in Rs.) TAX

0 – 300000 NIL

300001 - 500000 10%

500001 - 1000000 20%

Above 1000001 30%

Let us take an example of how tax is calculated

• Chetan Solanki, a 39 year old, is Manager in a leading firm, who has an annual income of Rs. 13,00,000/- p.a. He invests Rs. 1,50,000/- p.a. in an ELSS fund, to save his tax.

• He wants to know how much tax he can save by investing in ELSS.

Let us look at the following tables to see the difference:

Particulars Amount (Rs.)

Amount (Rs.)

Gross Annual Income 1300000/-

Tax on Income upto 250000/- NIL

Tax on Income 250001 – 500000 @10% 25000

Tax on Income 500001 – 1000000 @ 20% 100000

Tax on Income above 1000001 @30% 90000

Total Tax 215000

Add: Education Cess @ 3% 6450

Net tax payable 221450

Let us first consider without investing in ELSS:

Let us now consider with investing in ELSS to see how much he saves:

Particulars Amount (Rs.)

Amount (Rs.)

Gross Annual Income - 1 1300000/-

Less: Deduction under section 80C - 2 150000

Net taxable income 1 - 2 1150000

Tax on Income upto 250000/- NIL

Tax on Income 250001 – 500000 @10% 25000

Tax on Income 500001 – 1000000 @ 20% 100000

Tax on Income above 1000001 @30% 45000

Total Tax - 3 170000

Add: Education Cess @ 3% - 4 5100

Net tax payable 3+4 175100

As you can see the difference between investing in ELSS and not investing at all.

He is saving Rs. 46350, after investing in ELSS to the maximum amount he can claim as deduction under section 80C.

Now you might wonder, why invest in only ELSS when there are other options available under section 80C. The following example will make it clear.

Investment options under section 80C: Investment Options Returns (%) Lock In Tax On Income

MinimumInvestment

MaximumInvestment

Mutual Fund(ELSS) 15% - 18% 3 Yrs Tax Free Dividend

& Returns Rs.500 No Limit

PPF & PF 8.1% & 8.8%PPF -15 YrsPF – till 58

years Tax Free Returns Rs.500 Rs.150000

NSC 8.1% 6 Yrs Taxable - Interest Rs.100 No Limit

Fixed Deposit Around 7% 5 Yrs Taxable – Interest Rs.200 No Limit

National Pension Scheme

Depends on the asset allocation

Tier 1 – Can’t withdraw till

retirement ageTier 2 – Can

withdraw

40% of the amount withdrawn is tax free, 60% is

taxable

Rs. 500 No Limit

Senior Citizen Saving

Scheme ( Min. age 55 Yrs)

8.6% 5 Yrs Taxable – Interest Rs.1000 Rs.15 Lacs

There are other options like LIC premium, principal on home loan & tuition fees are also allowed as deduction under section 80C. Also note that NPS has an additional deduction of Rs. 50000/-, which is over and above Rs. 150000/-.

• As you can see in the above table, that ELSS has only a 3 year lock in compared to the other investments.

• Also, ELSS is one of the investment options, where the investment, interest and fund value are exempt from tax, if held for 3 years.

• The returns on an ELSS fund are high, as compared to the other investment options, under section 80C.

Tax Free Investments

• Under section 80C, there are a few products which have tax advantages over the other investments.

• ELSS, ULIPs, PPF, EPF, these are some investment options where everything is tax free.

• The investment/premium, the interest earned and the maturity amount, all are tax free.

Why ELSS, when you have other options too?

Let us now take an example of 2 sisters Karishma & Kareena :

PARTICULARS KAREENA KARISHMA

Investment Option Public Provident Funs ELSS

Amount of Investment 150000/- (Rs.) 150000/- (Rs.)

Lock in period 15 years 3 years

Term of investment 15 years 15 years

Rate of Interest 8.7% 11% - 12% average

Amount after 15 years 4675914/- (Rs.) approx 5172033/- (Rs.) approx

Please note that in the above ELSS calculation:

1. The amount of Rs. 150000/- p.a. is calculated only for 12 years, as each year’s investment has to complete 3 years.

2. The amount accumulated after 12 years, will grow for 3 years, without further investment.

3. So at the end of the 15th year, all your previous investments will have completed 3 years (i.e. the lock in period).

4. The average return taken is the minimum, whereas the return goes up to 20% in 3 to 5 years.

CONCLUSION ELSS is a good option to invest in as it is very

flexible as compared to the other investment options. There is no restriction on withdrawing the amount and also no penalty, if you stop investing in the fund. It will not only help you save tax but also help you create a corpus, for your future goals.

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