Save tax and create wealth
As a young professional, you may have to tend to diverse things that call for your attention, be it at work and in your personal life. In doing so, you may end up focussing too much on short-term goals. Managing your monthly budgets, buying a new car, clearing your existing debts and yearly tax planning are a few examples that can take up most of your time and energy. As a result, you wind up without a plan to create wealth in the long term. Let’s discuss how it is possible to combine tax planning and long-term wealth creation by investing in Equity Linked Saving Schemes (ELSS).
What is ELSS?
Equity Linked Saving Scheme (ELSS) is a type of diversified equity mutual fund. Investing in ELSS funds is a great way to save tax because under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs. 1.5 lakh from your total gross income in a financial year. In this scheme, at least 65% of the invested amount is put in equities. So, in addition to tax saving, ELSS funds provide you with an opportunity to grow your money.
Comparing other tax saving options
Public Provident Fund (PPF) and National Saving Certificate (NSC) are two popular tax saving options in the country. But if you observe closely, you’ll find that ELSS funds offer better benefits. For example, the above options come with extended lock-in periods. PPF has a minimum lock-in period of 15 years while NSC comes with a six-year term.
In comparison, the lock-in period on ELSS funds is just three years. This gives you greater freedom to deploy your funds based on your needs. In addition, ELSS funds offer much higher returns compared to other tax-saving options.
How ELSS can help you save tax and create wealth
Having worked your entire life, retirement can come as a big relief. During this period, you can pursue your hobbies, travel the world and spend more time with your family. But since you won’t be working any more, you need to create adequate savings to finance your retirement life without any problems. Here’s how ELSS funds come into play.
Imagine you invest Rs. 10,000 each month in ELSS through a Systematic Investment Plan (SIP) for a period of 30 years. Assuming a 12% rate of return on your investments, you would earn a corpus of Rs. 3.5 crore by the time you retire at the age of 60.
How to save through ELSS
To begin with, you need to ask yourself - How much money would I need at the time of my retirement? You can arrive at this number based on factors, such as your current income, number of years left for you to retire and your cost of living. Don’t forget to include inflation into your calculations. After arriving at an estimate, select the right fund to meet your needs. There are different options for you in the ELSS category. Some funds have greater exposure to large caps while others are exposed to mid and small-cap stocks. You can choose a fund type based on your investment needs and risk appetite. Once you zero-in on a fund, you can invest either through a lump sum or a Systematic Investment Plan (SIP).
If you are an employee and receive a steady income each month, consider investing through SIP. By doing so, you set aside a portion of your salary directly into the fund each month through a standing instruction to your bank. This allows you to invest in the fund regularly without interruptions.
ELSS comes with a three-year lock-in period, but if you are interested in long-term returns, you can continue investing in the fund for higher returns. Make sure to review the fund’s performance from time to time. Compare the returns against industry benchmarks. And if you feel that the fund is not performing up to your expectations, you can move your investment to another fund. Otherwise, you can invest in the fund for the long-term. In this manner, you can enjoy the dual benefits of tax saving and investment growth by investing regularly in ELSS funds.