quity linked saving schemes are mutual funds with a tax benefit.
If we are talking of this investment year (April 1, 2004 to March 31, 2005), you can invest up to Rs 10,000 a year in such schemes to avail of the tax benefit.
If you are looking at the next investment year (April 1, 2005 to March 31, 2006), you can look at whatever limit you want (up to Rs 100,000).
What are ELSS?
ELSS are the mirror image of diversified equity funds.
That means the fund manager will invest in shares of various companies across various industries. Hence, it is a normal equity diversified fund.
Then, there is the added tax benefit which a normal diversified equity fund will not have. This sets it apart.
Currently, if you invest in such funds, you get a rebate. Let's do it with figures.
You have to pay tax = Rs 18,000
Your rebate = 20%
You invest Rs 10,000 in ELSS.
Your savings = Rs 2,000 of your tax (20% of Rs 10,000).
So instead of paying tax of Rs 18,000, you pay a tax of Rs 16,000 (18,000 2000).
This has changed and you can invest much more than Rs 10,000. You pick your limit (up to Rs 100,000).
Why ELSS?
The returns are good. In the three years ended February 7, tax planning funds generated 42.58% annualised.
These funds have a lock-in period of three years. This is not bad at all. It prevents you from unnecessary withdrawals and spending and helps earn a return over time.
Moreover, the three year lock-in period is needed. Because when you invest in equity, you must take a long-term view. The real potential of equities starts to show only after a few years. This allows you to ignore the short-term slumps and stay invested for the long haul.
Also, the lock in gives fund managers the freedom to take sector and stock bets, which they are not able to do in the regular equity schemes.
The dividends you earn will be tax free.
When you sell the units of these funds, you can avail of the long-term capital gain for which there is no tax. If you sell after one year, you pay no tax.
The good picks
Five ELSS worth considering are:
i. Franklin India Taxshield
ii. HDFC Long Term Advantage (Earlier HDFC Taxplan 2000)
iii. HDFC Tax Saver
iv. Prudential ICICI Tax Plan
v. Sundaram Taxsaver
For a detailed analysis of such funds, see Five great tax-saving funds.
Since they invest most of their money in equities and equity related instruments, there is some amount of risk involved.
But it is always wise to have some amount of equity in your portfolio.
And if you are not too sure about directly getting into the stock market, a mutual fund is your best bet.
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