How To Save Tax?

Imagine a series of such missteps over a prolonged period of time would lead to some catastrophic financial mess. One could eliminate such heart brakes and utilize it to their advantage. If one could use these provisions to explore and plan properly, then it could be well entrenched into ones financial plan or for the wealth creation in the long run.

For instance, Equity Linked Savings Schemes (ELSSs) is one such instrument when put to good use, could generate wealth and not just help save taxes. ELSSs are a category of mutual funds that invest predominantly in equity and equity oriented instruments namely stocks to generate higher returns in the long term. These funds are open ended schemes with a lock-in for three years i.e. the invested units can’t be accessed by the investor for 3 years.

The invested amount is eligible for tax deduction u/s 80(C) to a limit of 1.5Lakh per annum. The attractiveness of this investment lies in the tax exemption over the returns. As per the current tax laws, investment returns out of listed shares and related investments are considered as capital gains. When these investments are held for more than one year then they’re considered as long term capital gains and this attracts nil taxation.

Unfortunately, the current pattern of tax savings by the Indian investors represents more of an obsession than about having any plan to the madness. As per the AMFI data, there seems a flavour of seasonality in the flows of investments into ELSS funds. The table clearly shows that Q4 (months of January, February and March) contributes beyond 50% of the total year and March contributing over a quarter of the whole year.

This despite the fact, these funds are available all through the year and there is no correlation of lower equity market performance during that period. And starkly so, there is a dip in the contributions in those years (2008-09/2011-12) when the stock market underperformed, ideal for one-time investments. This results in lower productivity of the invested amounts and in turn lesser returns.

Like any equity investment, a systematic approach (SIP) would benefit it in the rupee cost averaging of the investment i.e. the units are bought at various levels of the fluctuating markets. This enhances the productivity of the investment and also brings in the required discipline for planning. One has to however mind that the units could be redeemed only after 3 years from the date of investment which defers in release of the units for withdrawal accordingly, in a SIP.