From a long time, taxes have been perceived like a sword that is hanging on our heads. It tends to have a negative connotation for most people, but there are ways of saving them, rather than avoiding, and that is what we will highlight in this article.
Also, if we delve deeper on how the taxes provide for nationbuilding, we will find that paying taxeshappens to be one of the primary duties of every citizen that one should follow diligently and consistently.
The reality stands out that most people get daunted by the idea of taxation due to the limited understanding of the domain. They tend to make a series of investments into financial instruments enthusiastically just to save on taxesbut without understanding much about it. But what if, there was a way in which saving taxes could also be a smart way of building a future financial corpus?
There is indeed one such avenue and it is called ELSS mutual funds.Simply speaking, ELSSis a tax saving mutual fund investment wherein primarily the corpus is invested in the stock market.According to IT rules, investmentsof upto Rs. 150,000 in a financial year, in tax saving mutual fundsis eligible for deduction from taxable income under Section 80C of the Income tax Act 1961. This deduction is not selective and is available to all, irrespective of the tax brackets of an individual and HUF investor. To know more about saving taxes, Investors are advised to consult their tax advisor/ financial advisor for a better understanding of the subject.
Why invest in Tax Saving Mutual Funds?
High returns – An opportunity to grow your money by investing in equity mutual funds and remaining patient throughout the process can yield high returns.
Favourable taxation – There is no short term capital gains taxes as the units of ELSS mutual funds are locked-in for 3 years from the date of investment.Long term capital gains (when the units are redeemed)booked from ELSS mutual funds is totally tax free, if it is upto Rs 100,000 in any financial year. Profits booked in excess of Rs 100,000 is taxed onlyat 10%.
Lowest lock-in period–Tax savings mutual funds has the least lock-in period of 3 years compared to PPF(15 years) and bank tax saver fixed deposits (5 years).
Dividend payout option – You can opt for dividend payout option on your investment which helps you realize some potential gain during the lock-in period of 3 years. You must also note that dividend payments are made from the NAV of the Scheme and therefore, the NAV of the scheme will fall to the extent of the dividend payment on the date of dividend. Dividends are subject to availability of distributable profit made by the scheme. However, growth option in mutual funds is a better option as the returns compound over time.
For the purpose of long-term wealth creation, ELSS mutual fund schemes are defined as diversified equity mutual funds. ELSS happens to be giving the investors the best of both worlds when it comes to saving taxes and building a substantial financial corpus for the future. When pursued over the long term, ELSS mutual funds can be beneficial for investors.
ELSS mutual fund investmentis a must have tax saving investment option if you can take little risk in order to gain majorly in the long term.