What every Tax Payer needs to know about Mutual Fund ELSS?
Why would you want to use other tax saving investments, when you can invest in mutual fund ELSS?
Mutual Fund ELSS is among the most potent tax saving options available with the salaried class in India, at the moment. There are several reasons for which Mutual Fund ELSS may be considered a niche product on offer for the tax-payer angling to save their precious moolah.
The advantages that Mutual Fund ELSS offers, gives it a clear edge over other tax savings options and makes it a potentially strong tax planning instrument in the hands of the taxpaying employee.
In order to understand Mutual Fund ELSS in a more succinct manner, a few basic things about this favored tax-saving option are presented in a FAQ format.
The Income Tax Act permits exemption up to Rs. 1 lakh under Section 80C to salaried employees every year. In order to avail of this exemption, taxpayers have to invest in certain designated schemes specified.
Mutual Fund ELSS or Equity-linked Saving Scheme is one such option which offer tax saving benefits to the tax payer by investing the money in select equities.
The bouquet of tax savings schemes on offer are made up of a number of items like Life Insurance Policies, National Savings Certificates (NSC) and Public Provident Fund (PPF) investment schemes, to name a few. While these options may be solid safe investment bets, the lock-in period and the return that they offers may not be very attractive for all classes of tax-saver-investors.
For the purpose of saving tax, employees may opt for such schemes as National Savings Certificates, and Public Provident Fund however these schemes have a fairly long lock-in period. In fact it is 5 years for NSCs’ and 15 years for PPFs’. In comparison Mutual Fund ELSS have a lock-in of three years making it a relatively more liquid tax-saving option.
Besides this, the returns or dividend incomes are tax free for the ELSS schemes whereas NSC income is taxable. The sale proceeds from the Mutual Fund ELSS schemes are also exempt from long-term capital-gains tax when sold after the mandatory lock-in period.
Mutual Funds per se do not guarantee assured returns as the performance of a fund is dependent on the dynamics of the financial market. In fact past performance of a fund is also not a guarantee for future returns. The average return from mutual fund ELSS in the last one year is more than 12%.
The investor can either invest the total funds at one go or can opt for making monthly investments through SIPs (Systematic Investment Plans) .
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How to calculate CAGR in the case of a Dividend Pay MF, say 10 years after the investment? Given,
d1=investment date
d2=present date
NAV1= NAV on d1
NAV2=NAV on d2 (after payment of dividends over the time)
Initial investment=P1
Present value=V2
Dividend paid from d1 to d2= D
Dividend reinvested=0
NB: In case of pure Growth type MFs, Excell's XIRR gives correct CAGR as published. But in case of Div-Pay MFs, none of the two formulas given in this article give correct result. Please help.
Please calculate IRR for Dividend Paying investments. That can give better analysis.