Every year tax planning season begins in January-March. It is the time of the year when investors put their hard earned in investment instruments to save taxes. However many individuals make a mistake of keeping their objective to just save taxes and end up investing in products that do not generate enough wealth in the long run. This usually happens when financial goals are not set.
For those who want to save taxes and at the same time create wealth there are multiple options available in the market. And ELSS is one excellent product which stands out in comparison to other tax savers.
Here’s the table showing comparison of traditional tax saving instruments with ELSS on the basis of following key parameters:
- Tenure of the product
- Minimum investment amount
- Risk involved
- Most importantly the potential returns
|Investment Product||Lock-in Period (in Years)||Returns CAGR per annum||Tax Status of Returns||Risk||Partial Withdrawal|
|Public Provident Fund||15||0.081||Tax Free||Zero||Possible|
|National Savings Certificate||5||0.081||Taxable||Zero||Not Possible|
|5-Year tax saving bank deposit||5||0.07||Taxable||Zero||Not Possible|
|Equity Linked Savings Scheme||3||19.68**||Tax Free||High||Not Possible|
The above returns from ELSS are as on November 2016.
The only risks associated with ELSS are:
- Since the investments are market linked, the risks are higher as returns are not guaranteed. So past performance may not continue in the future. However it depends on the fund invested in. Check out zero risk investment options in India.
- It carries a lock-in period of 3 years, so there is no way out to exit i.e. withdraw money from the fund if losses are predictable. Although the lock-in period is lowest amongst other tax saving investment products.
- The diversification offered by these funds is across sectors and market capitalization. This allows your hard earned invested money to greatly benefit from the stock markets in terms of returns.
In addition to the above comparison table, ELSS offers multiple advantages over other tax savings instruments as follows:
Free insurance cover: Many ELSS funds free life cover to the investors. The premium cost is bourne by the MF company. And in the event of death of the investor, the insurance cover is used to pay the SIP amount.
Read about benefits of ELSS.
No cap on investment amount: Unlike few other tax saving instruments there is no limit on the maximum amount that can be invested in ELSS.
Ease of performance tracking: Every month the AMC releases the fund performance. So investor can track the minute details of how their hard earned money is invested and the returns generated at a regular interval. This helps investors to regularly track the list and type of stocks their money is invested in, sectors, and exposure in debt and cash.