What does ELSS mean? Which are the best/top performing “ELSS Mutual Funds” in India for FY 2014-15? Why do we call it Tax Saver Mutual Funds? What are the tax exemptions, we get under ELSS Mutual Funds? What are different types of options to choose while investing in ELSS?
We are again into another tax savings season and all are thinking of the best tax savings option for us? We know the common names like Life Insurance Premium, PPF, and Employees PF that can help you save tax under Section 80C. But the less popular one is ELSS – Equity Linked Savings Scheme.
What are ELSS Mutual Funds?
We have heard about the different types of mutual funds in the market. They are mainly classified as Equity Funds, Debt Funds and Balanced Funds. Within equity funds, a category of fund with certain additional conditions like lock-in period, income tax benefits etc. is known as ELSS or Equity Linked Savings Scheme.
ELSS Mutual Funds – Conditions
The ELSS Mutual Funds comes with a 3-year lock-in period – you cannot sell the units within 3 years from the date of investment. If you are opting for an SIP in ELSS Mutual Funds, then each SIP instalment will have the mandatory 3-year lock-in period. If you are opting for a dividend reinvestment option, the dividend units reinvested also will have this 3-year lock-in period from the date of allotment of dividend. But such reinvested dividend will be eligible for tax benefits under Section 80C in the year of dividend allotment.
ELSS Mutual Funds in India – Tax Benefits
The amount invested up to a maximum of Rs. 1 Lakh in a year will qualify for tax deduction under Section 80C along with other instruments like Life Insurance Premium, PPF, etc.
Since, it is equity linked mutual fund, there will not be any tax implication on the long-term capital gain, when you are selling the units after the 3-year mandatory lock-in period. So, the sale proceeds after 3 years will be totally tax-free in your hands. You get tax deduction on investing and the sale proceeds after 3 years are tax-free. If you are opting for the dividend option, any dividend received from ELSS is also tax-free.
ELSS Mutual Funds – Which Options to Choose while Investing
- Growth Option – In Growth Option, income earned by the Fund is not distributed to investors. Any income earned by the Fund increases the NAV of the units. Whenever the investor sells his units, he will realise long-term capital gain. He will not get any dividend in this option.
- Dividend Option – In the Dividend Option, the Fund distributes income earned by the Fund to the investors as periodic dividends. The date of dividend distribution and the rate of dividend etc. will be decided and declared by the Fund. The dividend received by the investor is tax-free in the hands of investors. But after the payout of dividend, the NAV of the unit reduces by the same amount of dividend. In effect, the investor is not getting anything extra from Mutual Fund dividends.
- Dividend Reinvestment Option – If the investor chooses this option, the dividends declared by the Fund will be reinvested in the Fund. For example, an investor is holding 1000 units of a Fund and the Fund declares dividend @ 1.5 per unit, the total dividend of 1500 (1000 x 1.5) will be reinvested in the Fund as a fresh purchase. The investor can claim deductions to the tune of dividend received which is Rs. 1,500.
ELSS Mutual Funds – Advantages over Traditional Tax Savings Instruments
PPF is the most popular tax savings instrument issued by the Government of India. Public Provident Fund (PPF) has a lock-in period of 15 years. But ELSS has a lock-in period of 3 years only. PPF is a debt instrument with a rate of return of 8% to 9% which is now linked to the government bond yield in the country.
The return in ELSS varies depending upon the market condition. Past experience however shows an average return of 12-15% over a long period of time.
But remember that, ELSS performance can be volatile in the short-term, being an equity investment. Invest in it only, if your investment duration is long-term.
ELSS Mutual Funds – Best/Top Performing for FY 2014-15
Given below are 5 of the best tax saving ELSS for FY 2014-15:
1. Canara Robeco Equity Tax Saver
This Fund is having a track record of more than 20 years and is a consistent performer.
2. Franklin India Tax Shield
This Fund is in existence for the last 15 years and is a good performer.
3. ICICI Prudential Tax Plan
This is a value fund from the ICICI fund house with almost 15 years track record of good performance.
4. Axis Long Term Equity Fund
Though the Fund is having only 4 years’ track record, it is worth investing due to its stellar performance.
5. BNP Paribas Tax Advantage Plan
This 8-yr-old Fund is also a star fund in the ELSS category.
ELSS Mutual Funds – Point of Caution
Though the mandatory lock-in period in ELSS Mutual Funds is 3 years, just like any other Equity Mutual Fund, you can expect decent returns only if you have an investment horizon of at least 7 years. Investing through SIP covering the 12-month period will be better to benefit from the rupee cost averaging. Opting for Growth Option will help you in capital accumulation.
What is your view on ELSS Mutual Funds?
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