The word `Tax' has the merit of deepening the forehead lines in vexation while the words `Tax Saving' assuages this vexation just as a soothing balm relieves pain. Tax planning is a necessary adjunct to tax saving and if done at the right time, combined with the financial goals one intends to achieve, the soothing is all the more efficient and effective. Once you accept the tax codes that allow for tax saving under existing rules, the debate begins which of the available instruments are best suited to align investment portfolio goals to tax planning. Here we provide a perspective for taking the right investment decision by analyzing Equity Linked Savings Schemes (ELSS), considered to be one the most potent tax saving instruments currently available.
ELSS schemes are offered by most mutual funds. Although there is no upper limit to how much one can invest in ELSS, tax deduction is restricted to Rs 1.5 lakh per annum, with a three-year lock-in. This money is invested in stocks and hence the returns are market linked.One may opt for a dividend or a growth option under ELSS. Dividend is tax free while under the growth option gains, classified as long term capital gains, are also tax free.Historical data show that average annualized returns from ELSS, over a three-year period, has been 14.7%, with the high as much as 21.5%.
Going by all these factors, one could infer ELSS to a short lockin and high inflation-buster instrument.
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