Tax-Savings with ELSS Mutual Funds
Have you done your tax planning for Financial Year 2014-15, if not than the you don’t have much time left. The investments have to be made before 31st march, 2015 to avail tax benefits and save taxes.
Tax Planning comprises availing of deduction under various sections but with a priority to fully utilize the threshold limit of section 80C which his Rs.1.50 lakhs. ELSS Mutual Funds topped the list, not only because of being EEE scheme but also it is the only investment under section 80C that offers lowest lock-in period of 3 years.
Here are few important facts that you should know before investing in ELSS Mutual Funds.
1. Risk Involved
ELSS mutual funds are diversified equity funds that carry the same risk as any other mutual funds. But with a lock-in period of 3 years, quantum of risk involved in ELSS is more than other funds.
However, by looking at the performance of ELSS Funds of last five years, the annualized return comes to over 15% which is more than other equity diversified funds which had given 14.3%.
But not all ELSS funds have performed so well. The Top ELSS Mutual Fund fetches an annualized return of 21.7% while the worst fund has given an annualized return of 3.8% only for the same period. So one needs to be utmost careful while choosing the right fund for investment.
ELSS Mutual Funds falls under the category of EEE (Exempt, Exempt, Exempt). First ‘E’ refers to the exemption of the invested amount as deduction under section 80C.
The second ‘E’ is the exemption of the capital appreciation on the ELSS Funds. The investor is not required to add the appreciated value of funds in his income and pay tax on it.
The last ‘E’ denotes the exemption of the amount withdrawn. With a minimum lock-in period of 3 years, the ELSS funds becomes the long-term capital asset and any capital gains made from equity oriented mutual funds are exempted under section 10(38).
The other investments that enjoy this EEE tax treatment are Public Provident Fund and Employee Provident Fund.
3. Lock-in Period
ELSS Mutual Funds have a lowest lock-in period of 3 years under the section 80C investment list. The other tax-saving investments start with a lock-in period of 5 years such as tax-saving bank fixed deposit, National Saving Certificates (NSC) etc.
Point to note for the Investor taking a Systematic Investment Plan (SIP) route is that each monthly installment of SIP is considered as a separate investment and gets locked of 3 years. So the installment of December 2014 will be open for withdrawal only after December 2017, similarly installment of April 2015 will get locked up to April 2018.
4. Premature Withdrawal
No Premature Withdrawal is allowed for ELSS Mutual Funds. Once investment is made in ELSS scheme and deduction is claimed under section 80C than you have to wait for lock-in period of 3 years for withdrawal.
But there is a caveat that if you have invested in ELSS Mutual Funds but have not forgotten or have not taken the tax benefit of the investment due to NIL tax payable, than you are eligible for premature withdrawal. This can be done by getting a certificate from Income Tax department. However there is no standard procedure for the same.
5. Growth or Dividend Option
There are three types of plans under ELSS Mutual Funds: Growth Plan, Dividend Payout Plan and
Dividend Reinvestment Plan (Read: Dividend Reinvestment Plan under ELSS is Phased Out). Under Growth Plan your investment keeps cumulate till the redemption. Dividend Payout Plan is a regular income plan which gives you a certain tax-free sum of capital appreciation. The last one is dividend reinvestment plan under which your dividend will be reinvested in the plan. For the tax planning view this plan should be avoided because each dividend reinvestment is treated as a new investment and gets locked for 3 years. In case you had opted for dividend reinvestment plan, write an application to fund house asking to shift to the dividend payout plan.
6. Threshold Limit
The minimum investment in ELSS Mutual Fund is Rs.500. Unlike PPF, where at least one contribution of Rs.500 is necessary in each year to avoid penalty, ELSS can be continued till maturity with only one time investment of Rs.500.
There is no upper limit of investment in ELSS Mutual Fund; however deduction under section 80C is available for maximum of Rs.1.5 lakhs.
7. Top 5 ELSS Mutual Funds in 2015
Words of Wisdom
Since ELSS Funds are per se stock market investment, Investor must assess his risk taking abilities before investment. Also fund should be chosen on the basis of its performance in good as well as bad times.