ELSS – Best Tax Saving Instrument

By | September 25, 2016

In the world of tax saving and good returns there is nothing to beat ELSS. Equity Linked Savings Scheme (ELSS) is the shortest lockin period of all the schemes under 80C. The other options like FD, Insurance, NPS etc have higher lock in periods.

The returns on equity are higher than all the above over a 3 year period. Coming to tax treatment, the returns are treated as Long Term Capital Gains (LTCG). LTCG has an option of Indexation and lower tax rate of 20%. Dividends received are completely tax free.There is a marginal risk involved in equity.

ULIP gives exposure to Equity but costs are too high. ULIP has a longer lockin period also. The ULIP has a mandatory commitment also. The surrender value in ULIP is very low if you withdraw before 10 years. Based on this, ELSS is better than ULIP.

Bank FD with 5 Year Lock in is also eligible for tax saving under 80C. Fixed return and the return is fully taxable at normal rate. Indexation benefit is not available. Average return below 8%. Reducing the tax, the net return is below 6%. Adjust inflation this will be approximately 1%.

Insurance is long commitment and the costs are high. Insurance shall never be treated as a saving option. If one needs Insurance, best option to go is Term Plan. Term plan will not give any return, but gives security.

Other options such as NPS is similar to Insurance. Long commitment and high lock in. NPS works great when treated outside 80C. One can use NPS for tax saving beyond the stipulated 1.5 Lakhs under 80C.

PPF has 15 Years Lock in period and highly illiquid. Returns are taxable at normal rate without indexation benefit. Gives security better than Bank FD. Net post tax return is limited and comparable to Bank FD.

If you see all the above, ELSS scores on all fronts except risk. High tax efficient Returns, Indexation benefit, less lock in period, ease of fund management, intermediate returns in the form of dividends …. the list can go on.

It is time to look into all these and go for ELSS for tax saving under 80C.