As we are approaching the final quarter of the current financial year, tax planning will be one of the most important priorities for many tax payers. Section 80C of Income Tax Act 1961, allows investors to claim deductions from their taxable incomes by investing in certain eligible schemes. In this blog post, we will discuss 5 reasons why you should invest in tax saving mutual fund schemes referred to as Equity Linked Saving Schemes (ELSS), and the Systematic Investment Plan (SIPs) offered by them.
Convenience and Flexibility
ELSS offers investors the convenience of investing through SIP mode in which you can invest fixed amounts every month (or any other frequency) for tax savings. SIP not only helps investors stay disciplined, it can also help them get higher returns through Rupee Cost Averaging.
Investment proceeds of some 80C investments like PPF are tax free, but interest paid by some 80C investments are taxed as per the income tax rate of the investor. Till the beginning FY 2019, ELSS capital gains / profits were tax free but a change in taxation was introduced in this year’s Union Budget. Capital gains of up to Rs 1 Lakh in ELSS mutual funds will be tax exempt. Capital gains in excess of Rs 1 Lakh will be taxed at 10%. Incidence of tax in ELSS investments arises only at the time of redemption and not during the term of the investment. Even with the introduction of the capital gains tax, ELSS remains one of the most tax efficient 80C investment options.
ELSS offers the maximum liquidity amongst all 80C investment options. PPF has a tenor of 15 years with very limited liquidity in the interim. Minimum investment tenor of all non-ELSS 80C schemes is 5 years. ELSS mutual funds have a lock-in period of only 3 years. Your money is not locked up for long periods of time in ELSS and you have the option of redeeming your investment partially or fully after the lock-in period. When investing in ELSS through the SIP route, investors should remember that each SIP instalment will be locked in for 3 years and should plan accordingly.
Reduce your tax obligations for the current financial year
The most obvious reason for making 80C investments is tax savings schemes. You can claim up to Rs. 150,000/- deduction from your gross taxable income by investing an equivalent amount in ELSS or other eligible 80C schemes; you can save up to Rs. 46,800/- in taxes (for investors in the highest tax bracket) every year. SIP is a disciplined way of making tax saving investments throughout the year to achieve maximum tax savings.