What makes ELSS a tax-efficient equity investment?

An effective investment product is one in which the total cost of investing through that product remains low. This includes the tax exit. Equities as an asset class are gaining even more popularity and a tax-efficient product for participating in this asset class is an Equity Linked Savings Plan (ELSS).

ELSS is one of the products that falls under the deduction of Rs1.5 lakh allowed in section 80C of the Income Tax Act 1961.

How is ELSS taxed? Until the 2017-18 financial year, there was no tax on capital gains on equity and mutual funds over one year. However, as of April 1, 2018, investment fund investors have to pay 10% Long Term Capital Gains Tax (LTCG) on profits above Rs 1 lakh per year. This means that gains made on ELSS investments will be subject to LTCG tax when you redeem your units if the net gains from equity and equity funds cross all Rs 1 lakh in a financial year.

If you have multiple investments in stocks, say, as direct stocks, ELSS and other types of investment funds, if you sell one of them and earn more than Rs 1 lakh over the course of of that exercise, then there is 10 percent LTCG on the winnings.

Tax efficiency: For those in the higher tax brackets, an LTCG rate of 10 percent is much lower than their income tax rate of 30 percent and above. Therefore, ELSS offers greater tax efficiency. Some of the other tax saving options, however, provide non-taxable returns or add the returns to the investor’s income.

How to invest You can invest in ELSS through systematic investment plans (SIPs) or lump sums. SIPs allow for regular investment, which is convenient for many investors, and helps to average market volatility and returns. When markets are high, the investor ends up buying fewer units, but when markets are low, more units are allocated, resulting in an average set of longer term returns. However, each SIP payment will have a three-year lock-up period, making it difficult to withdraw a lump sum.

However, the fact that ELSS comes with lower lock-in than most other tax-saving products and offers pure stock play makes it an attractive option if you are looking to achieve long-term goals.

Comments are closed.