Tax season is here: Time to give a thought to ELSS
February, 16th 2009
It is that time of the year when you rein in your splurging activities and invest in schemes that help you to save on income tax. Till March 31 - the last date for making tax-related investments - you are likely to be inundated with tax-saving products that claim to minimise your tax outgo, fulfil your investment needs and also offer protection.
If you haven't made the necessary investments already, it is time to go through your salary statement to find out the amount you need to set aside for claiming deductions up to Rs 1 lakh under the section 80C of the Income Tax Act.
The section offers a varied range of instruments to choose from, including employees provident Fund (EPF), public provident fund (PPF), national savings certificates (NSC), 5-year tax saver bank deposits, unit-linked insurance plans (ULIPS) and equitylinked savings schemes (ELSS).
"If you are looking at equity as an asset class and want tax reliefs as well, you can opt for ELSS, provided your goals are 5-7 years away," says financial planner Gaurav Mashruwala. These schemes are similar to diversified equity funds, but they are tagged with a lock-in period of three years.
Equity is considered by many experts to be the asset class that can yield returns higher than many other instruments in the section 80C basket. "Since the valuations are quite low at the moment, it makes sense to invest in ELSS. Your money will be locked in for three years, post which, these schemes are likely to emerge with noteworthy appreciation in value," says Zankhana Shah, head, Money Care Financial Planning.
What's more, unlike five-year tax saver deposits and national savings certificates, where the interest earned is taxed on maturity, the redemption proceeds received at the end of the lock-in period are not subject to tax. Though the 8% return-yielding PPF is free of this drawback and is also considered a safe haven in turbulent times like these, the 15-year lock-in period could be a major deterrent.
As for ULIPs, though the insurance-cum-investment factor has resulted in these instruments becoming a major hit amongst tax payers, high initial costs and recurring payments that they necessitate act as the major limitations. On the other hand, commission paid to distributors is comparatively lower in the case of ELSS, which from an investors perspective, translates into higher amount available for investment.
ULIPs are meant to be long-term products, where the policyholder stands to gain market-congruent returns only over a period of 10-15 years. In contrast, ELSS funds provide you the cushion for redeeming the units to fund your near-term goals after three years, should the need arise.
While ELSS funds seem to have an edge over the others, there are certain limitations as well. The risk element is inherent in every equity-oriented product and ELSS funds are no different. Hence, it may not be suitable for an absolutely risk-averse investor.
Even within the ELSS category, it is better to identify the ones that are relatively less risky. "Typically, after accounting for tuition fees, home loan repayment and insurance policies, an assessee would be required to invest only around Rs 20,000-40 ,000 in other 80C instruments. Therefore, there is no reason why preference should be given to riskier schemes that yield merely 2-3 % higher returns than the 'safer' funds," contends Mashruwala.
The parameters for selecting an ELSS fund arent significantly different from those for picking an equity diversified fund. The focus ought to be on the track record of the fund, the fund manager, the fund house and the risk involved. Choose a fund that has consistently performed well in all market conditions rather than the one that has reported impressive figures in the last few months.
A cursory glance at the last four editions of ET Mutual Fund Tracker reveals that SBI Magnum Tax Gain Scheme 1993 and Sundaram Tax Saver have been consistently rated as either platinum or gold schemes over the last four quarters, thereby proving their mettle even in these dark times.