Dual benefits from a single investment

There is a fundamental difference between tax saving and tax planning. Tax saving is usually done in desperation during the month of March, blindly putting money in an instrument along with someone you know, usually office colleagues. Tax planning, however, is a more systematic and well-informed approach towards not just saving on taxes but also ensuring capital appreciation on the amount invested.

While the traditional options like PPF and NSCs are resorted to by tax savers, the astute tax planners are increasingly opting for instruments like Equity Linked Savings Schemes, better known as ELSS. These are diversified equity mutual funds, which qualify for tax exemption under section 80C of the Income Tax Act.

While there is a certain amount of risk involved, since these schemes invest in the equity market, there are several benefits as well. For starters, there is no tax levied on the long-term capital gains from such funds.

Plus, compared to the 15-year lock-in period for PPF and 6 years for NSC, the ELSS lock-in period is just three years. Moreover, being an equity linked scheme, the scope for returns is much higher with ELSS as compared to traditional tax saving instruments, over the long term, say 5 – 15 years.

In fact, with ELSS, one can take the dividend option and get some income during the lock-in period as well. The dividend income is tax free in the hands of investors. Further, you also have the scope for investing at regular intervals using the Systematic Investment Plan (SIP) mode instead of investing a lump sum at the financial year end.

ELSS makes sense for those who are not too risk averse and would like to earn better returns rather than just focus on saving taxes. It is also a good way to start off investing in equities as the mutual fund route offers a safer way to do so, coupled with better returns because of the professional management.