Saving taxes and creating wealth are two objectives that all of us aspire to achieve. There are several instruments that can help you do so. However, has it ever crossed your mind if there is a single instrument that can aid you in achieving the twin objectives? If yes, you have a reason to rejoice.
This is because investing in an equity-linked savings scheme (ELSS) can help you hit two birds with one stone. Read on to know how to save tax and create wealth simultaneously with ELSS.
ELSS is a category of mutual fund that invests more than 65% of the corpus in equity or equity-related instruments. In other words, ELSS has an equity-heavy portfolio, and investing in this mutual fund channelises your investments into equities. ELSS is also a tax-saver instrument, investing in which can help you lower your tax liability.
Saving taxes through legitimate ways helps you save money that you can put to good use. Also, every penny saved is a penny earned, and in the long run, it adds significantly to your overall earnings.
Tax saver investments help you accomplish life goals in the process. As per the Income Tax Act, 1961, investing in multiple instruments can help you lower your tax liability. However, they also help you address different life goals. For example, while premiums of life insurance plans are eligible for tax deduction, life insurance, particularly term plan, helps you secure the future of your dependents in your absence.
Similarly, investing in NPS helps you secure your retirement while paying medical insurance premiums ensure you continue to receive the benefits of your health insurance policy.
Tax savings help you inculcate a disciplined financial habit as you set aside a portion of your income to lower your tax liability. As tax savings is a yearly exercise, doing so regularly can help you build prudent financial habits that can augment your riches and help you fortify your finances.
ELSS is a tax saving mutual fund. When you invest in ELSS, the amount qualifies for tax exemption under section 80C of the Income Tax Act, 1961. Under this section, investments up to Rs. 1.5 lakhs in different instruments as outlined under the section are eligible for tax exemption.
If you haven’t invested in any of the instruments mentioned in this section, you can claim a deduction on investments made up to Rs. 1.5 lakhs in ELSS. On the other hand, for instance, if you are yet to exhaust this amount fully, then you can invest the remaining amount in ELSS and claim deduction on the same. Let’s understand it with a numerical example.
Suppose you have invested up to Rs. 1 lakh in different tax saver investments under section 80C, then you still have Rs. 50,000 left as an investible surplus. You can invest this amount in ELSS, claim deduction on the same, and lower your tax liability.
Now that you know how to save tax via ELSS, it’s time to figure out how you can create wealth by investing in ELSS. As ELSS has an equity-heavy portfolio, a chunk of your investment will flow into equities. In the long term, equities have the potential to deliver inflation-adjusted returns. Thus, staying invested in ELSS for the long haul can help you augment your wealth significantly.
Note that the key to generating wealth via ELSS is to choose a fundamentally strong fund that has delivered consistent returns over the long term (5 to 8 years). Also, it’s vital to remain committed to your investments for the long term as equities are volatile in the short term. Only if you stay invested for a long period can you make meaningful gains.
You can invest in ELSS from as little as Rs. 500 per month. In other words, you don’t need a large amount upfront to kick-start your ELSS investment. You can top-up the amount with an increase in income, which will help you in accumulating even a bigger corpus.
Among all tax saver investments, ELSS has the shortest lock-in period, i.e. 3 years. You can withdraw money after 3 years from the date of investment. Other tax-saving investments such as PPF has a lock-in of 15 years, while in NPS, you can withdraw money (60%) of the corpus as a lump sum after you turn 60.
This is a major advantage that ELSS has over other tax-saving schemes. Returns from most traditional tax-saving schemes, though fixed, can hardly beat inflation. However, things are different with ELSS. As this tax-saving mutual fund invests in equities, they have the potential to generate inflation-beating returns in the long term.
Note that section 80D of the Income Tax Act, 1961 allows exemption on premiums paid towards medical insurance for self, spouse, children, and parents. On the other hand, investments in tax saving mutual funds qualify for exemption under section 80C.
There are two ways to invest in ELSS:
In this mode of investment, you invest a large sum of money in one go. For example, if you have received a windfall or maturity proceeds from your life insurance policy, you can invest a lump sum in ELSS to lower your tax liability and create wealth.
Here, you invest a fixed amount of money at periodic intervals in your chosen fund. SIPs inculcate a disciplined savings habit and help you stay invested across market cycles. Note that each SIP in ELSS is locked in for a period of 3 years.
As evident, investing in ELSS can help you address two crucial life goals with utmost ease. If you are yet to invest in an ELSS fund, this is the right time to do so as markets are amid a bull run. Pouring money in ELSS can significantly enhance your riches.
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