Save tax while accumulating wealth

75-Lawrence-Praveen-Lobo

WE LOOK FORWARD to taxation reforms in every Union budget. None of us, whatever be our occupation or salary, enjoys the bite of taxation. As soon as your salary crosses the base limit for taxation, you begin looking for ways to stem the outflow and bring home as much of your CTC as possible. What if you are told that you could save on tax while also accumulating wealth? That is exactly what you can achieve by investing in equity-linked saving schemes, or ELSS. This investment option allows you to partake in the high growth potential of equities while also enjoying tax rebates up to $1.5 lakh a year.

ELSS: EVERYTHING YOU SHOULD KNOW

Eligible for tax deductions under Section 80C of the Income Tax Act 1961, ELSS mutual funds are an excellent choice when you want to save taxes. The asset allocation for ELSS ordains that at least 80 per cent of the entire corpus should be invested in equity and equity-linked securities like listed shares, while the remainder can be parked in fixed income assets. Further, as ELSS funds come with a lock-in of just three years, they can be a great alternative to other, longer tenure instruments that fall under the purview of the 80C provision. Given the fact that you can begin investments with as little as $500, ELSS can act as your long-term investment plan for saving taxes as well as accumulating wealth.

In addition to the tax-saving properties of the fund, ELSS also offers you an opportunity to participate in the growth of your country’s economy and stock markets. This is especially possible if you choose to invest via the systematic investment plan (SIP) option as you will allocate money on regular intervals, through market ups and downs. This ensures that you enjoy the benefits of rupee cost averaging and compounding, thereby enabling you to both save taxes as well as grow your money over the long term.

BENEFITS OF ELSS

The main benefit of ELSS is the tax saving that you can achieve through this investment. In line with the provisions of the Act, an investment of up to $1.5 lakh can be claimed as a tax deduction in a financial year. Let’s take an example to better understand the tax savings that can accrue with an ELSS investment.

Assume that you fall in the highest tax bracket but your income is less than $50 lakh a year. You will be paying tax at the rate of 30 per cent plus cess @ 4 per cent of taxes paid. Now, if you invest $1.5 lakh in ELSS, then let’s see how much money you can save by minimising your tax outgo.

Tax + cess = 30% + 4% of 30% = 31.2%

Amount invested = Rs1.50 lakh

Tax saved = 31.2% x Rs 1.50 lakh

= Rs46,800

The above calculation makes certain assumptions to arrive at a tax-saving figure of $46,800. Nonetheless, it will still give you an idea about the amount of tax outgo you can save by investing in ELSS.

While ELSS undoubtedly offers the benefit of tax saving, it also provides some additional benefits.

The potential to create long-term wealth:

While the lock-in period for ELSS is three years, leaving your money in ELSS funds for longer can let you benefit from the long-term growth opportunities provided by equities.

SIP for discipline and saving habits:

When you invest in an ELSS, you also have the option of investing via regular SIPs. This means that you invest a fixed amount monthly or quarterly, thereby ensuring that your tax saving is well-planned. Further, the benefits of rupee cost averaging, compounding and disciplined investing will also accrue to you over the long term.

So, if you are looking for an avenue to save tax while boosting your wealth, ELSS is a way to beat inflation while also staying ahead of the tax monster. Pick wisely and you have a winner at hand!

The author is a mutual fund distributor.