SMART GUIDE ON TAX SAVINGS

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Brianna Hoover
5 years ago
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1 SMART GUIDE ON TAX SAVINGS

2 ELSS - Smart Guide on Tax Savings These days a lot of times, people end up lowering their net income by paying higher taxes. This usually happens because of improper planning, paucity of time and deferring tax planning to last minute deadlines when the HR calls for submission of tax papers. People often fail to realise that tax planning is not a one time last minute activity but a continuous one. Usually, because of being unaware about tax saving investment avenues, people often chose traditional avenues of tax saving instruments like FD, PPF without even realising that better options are available in market.

3 At Arihant, we want to make sure that you make the right investment decisions even concerning your tax investments. We understand that selecting the right plan or mutual fund scheme can be an intricate task. That is why we understand your needs first and then recommend the best investment plan and scheme for you.

4 What is ELSS? ELSS or equity linked savings schemes are tax saving mutual fund investments which invest majority of their corpus in equity and equity related instruments. ELSS is the only option under Section 80C which allows you to reap the benefits of the returns generated by the equity markets and at the same time offer complete tax shield at the lowest cost possible. With mutual fund ELSS schemes, planning your tax saving investments becomes much easier and convenient. ELSS is built to offer benefits of capital appreciation based on equity gains and tax benefits to investors. Not just that, a third benefit of investing in these schemes is that the long term capital gains made through these investments are exempted from tax.

5 ELSS Tax Benefits With only 3 years lock-in period, a host of tax benefits coupled with the opportunity to earn high returns, ELSS is one of the best tax saving investment avenues you must invest in. ELSS enjoys the triple tax advantage. The amount invested in ELSS up to the limit of Rs. 1.5 lakh is exempt under Section 80C. ELSS funds are equity oriented and dividend income and the long-term capital gains on them are exempt from tax thus making the maturity proceeds entirely tax-free for an investor.

6 Whereas, in case of tax-saving FDs, post office FDs and NSC the interest earned is taxable as per your income tax slab; investments in NPS and pension plans are taxed at the time of maturity. Insurance is also an EEE (exempt-exemptexempt) investment but it is not a pure investment product. Though PPF enjoys the EEE benefit like ELSS, investments in PPF are extremely illiquid with the highest lock-in period. Equity Linked Savings Schemes offer more liquidity compared to most tax saving (Section 80C) investment options. If you are investing in ELSS through SIP, each SIP instalment will be locked- in for three years. The dividend option of Equity Linked Savings Schemes (ELSS) provides investors with the option of getting tax free income from their ELSS investment during the lock-in period and beyond.

Mistakes people make while investing in ELSS There are some common mistakes that are generally made by an investor seeking to invest in ELSS 01 Beginning late People generally start investing in ELSS

7 Mistakes people make while investing in ELSS There are some common mistakes that are generally made by an investor seeking to invest in ELSS 01 Beginning late People generally start investing in ELSS towards the end of the financial year when the time for showing investment proof comes close. We believe this is not an ideal strategy as it could not only lead to cash flow mismatch problems but also may result in high cost of investment due to unfavourable market conditions.

8 02 New fund every financial year ELSS is opting for a new fund every year. Investors many times get swayed by recent Another common mistake while investing in performance of a fund and invest in the top performer of the year. However, there are many disadvantages of this approach, one is that it results in a portfolio which has many funds of the same category which results in difficulty in tracking and managing the portfolio, the other issue is that the approach of selecting a fund by its recent performance is faulty and a fund can always be selected on the basis of consistent performance.

9 03 Switching funds every three years or withdrawing Since ELSS have a lock-in of 3 years, people think that they should redeem their investment in ELSS once it completes the lock-in period. However, ELSS is an Equity mutual fund and an ideal time horizon for equity funds is at least 5 its performance should be evaluated and the years. Once 3 years complete of an ELSS fund, decision to redeem or continue should be taken based on the same.

10 04 Choosing between Dividend and Growth Plans Investing in ELSS should be ideally done under an individual's investment priority basis i.e whether to chose growth plan or dividend plan. Since ELSS is a long-term investment it is always beneficial to opt for growth option as it brings in additional compounding benefit. Since the dividends are not reinvested but paid out under dividend plan, the dividends are not available for compounding thereby resulting in lower returns over the long-term. Growth?? Dividend

11 05 Unclear about fund category Companies design their ELSS funds based on a combination of large, mid and small-cap companies. Thus, depending on the share of each of the category, the risk and return profile vary for each ELSS funds. The large cap oriented ELSS funds are safer than mid cap and small cap oriented which are more volatile. Investors should ideally understand the category in which they are investing and make an informed decision based on how much risk they can take and their horizon of investment.

12 funds which offer consistent returns over a long term short term high returns. We believe an investor should focus on 06 Selecting funds based on current performance and sort the funds based on returns over these periods. Investors generally tend to see the returns for one-year period Sustainability & consistency of returns is more important than

13 Best performing ELSS schemes ELSS Scheme Name 3 Years Returns Amount Invested Fund Value After 3 Years Reliance Tax Saver Fund 14.41% DSP BR Tax saver Fund 17.05% Birla Tax Relief % Motilal Oswal Long Term Fund 22.15% IDFC Tax Advantage Fund 18.76%

14 ELSS vs. PPF vs. NSC vs. Tax Saving FD: Returns 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Lock-in Period 3years 18.2% ELSS Funds are the best bet for beating inflation Lock-in Period 15 years Lock-in Period 5 years Lock-in Period 5 years 7.9% 7.8% 6-7.5% Lock-in Period Retirement age ELSS PPF NSC 5 Years FD EPF Tax savings investment avenues 8% Despite lower lock in period, ELSS gives high returns and is one of the best ways to save taxes.

Everything about ELSS funds

Everything about ELSS funds How much can I save using ELSS funds? You can get a deduction of up to 1.5 lakhs from your taxable income. Depending on your taxable income, you could save up to 45,000 every