There is various tax saving investment options. And individual can save tax under 80 C of income tax act. However, all such investment options come with fixed returns. Therefore, you can check Best Mutual Fund SIPs to invest in 2017. Also check track record of price fluctuations. For additional details on ELSS you can refer Equity Linked Savings Scheme.
Different between Mutual fund and ELSS
However, investments in ELSS qualify for tax deductions under SEC 80C of income tax act. But under normal mutual fund do not qualify for income tax deductions. And any dividend received or long term capital gain earned is tax free. There is not much different in ELSS mutual fund and equity MF scheme.
Therefore long term capital gain arises on selling units of mutual fund after 1 year of purchase. Since there is lock in period of 3 years you will realize long term capital gain or loss on selling their holdings. For details on Mutual funds see what is a Mutual Fund and how does it work?
Advantages of ELSS over other tax saving instruments
Similarly, ELSS mutual funds help you to grow money. Since ELSS mutual funds invest in equity related instruments. And these schemes will help you to grow your money when stock market grows. By investing in ELSS mutual funds you are eligible for tax exemption up to Rs 1 lakh u/s 80C. So if you have not utilized 80C fully is good option to invest in ELSS funds.
Furthermore, compare to fixed tax saving instrument like Public Provident Fund (PPF). In addition, like National Savings Certificate (NSC) and bank fixed deposits. But ELSS fund is much lower than other tax saving instruments. Hence, view what is ELSS
If you observe returns from tax saving investment options other than PPF are tax free. In addition like NSC, Tax Saving Bank FD, Tax saving Post office TD scheme etc. However, Public Provident Fund is tax free. But that comes with 15 year lock-in period. Further only tax saving investment option provides tax free returns for short period is ELSS Mutual funds.
However, ELSS savings is locked in for 3 years. In addition, PPF savings is locked in for 15 years. And NSE savings is locked in for 6 years. Therefore bank fixed deposits eligible for tax deduction are locked in for 5 years. Probably, ELSS is savings in equity markets for long term. It will give you better returns compare to other asset classes over long term.
Probably, you can also opt for SIP investments to bring discipline in regular invest. And you can also get income from your savings amount in lock in period. You can opt for dividend schemes.
Disadvantages of an ELSS
ELSS is not for risk averse investors. But ELSS investments are stock market investments. And all risks related with equity investment relate to ELSS. So you are better to avoid ELSS if you don’t want to take this risk. Another disadvantage of ELSS is that you cannot withdraw your funds before maturity date.
Therefore other tool like PPF and bank deposits permits premature withdrawal to certain conditions. As market is always changing no one can guarantee returns after some years. In such cases you must be patient and withdraw your money when market is on high.
Options while making ELSS investments
Growth option: In growth option income earned by fund is not spread to unit holders. And you do not earn any dividend during time you hold fund. So any income or profit earned by fund increases NAV of fund. Moreover, whenever you sell holdings will take in long term capital gain or loss. Hence, you will not get any benefits in form of dividends.
Dividend Option: In this option fund distributes income earned by fund as dividend. And distribution date is declared by fund. However, if fund has negative income it will not distribute any dividend. Probably, any dividend received by you is not liable for tax in hand.
Dividend reinvestments option: If you have choose this option dividend declared by fund are reinvested. For example if you hold 10000 units of fund and fund declares dividend @ 1.5 per unit. So total dividend of 15000 (10000*1.5) will be reinvested on behalf of investor as fresh purchase.
It is good option in this case that market is performing very well during 3 year tenure of Lock in period. Hence, you will gain to large extent from it. And you will withdraw your amount in hand will be quite huge as well. Hence, check how to invest in ELSS through SIP
Finally, Use tax calculator to check impact of ELSS savings on your tax payable. However, see list of top rated ELSS funds. And you must look at long term performance of fund before put your money in it. Hence, you shall choose best mutual fund scheme.