Most people invest only in equity linked savings scheme for tax saving. This is the reason why they get out of it after a lock-in period of 3 years. If one invests in ELSS for a long time, a better return can be achieved.
Tax savings can be done not only through ELSS funds, but also with the right use, you can also prepare big capital.
Equity Linked Savings Scheme (ELSS) is considered the best option for availing tax exemption. Through ELSS, investors not only reduce tax liability, but also create a large capital in the long run. You can understand from the name itself that ELSS funds are related to equity market. If you are thinking of saving tax, then you will get a complete list of tax-saving mutual funds. ELSS schemes are usually flex-cap funds. This means that they all invest in companies of size and sector. Along with this, there is also an option to change the portfolio composition based on the market condition.
Why ELSS to make big capital with tax savings?
Most people do not plan for tax savings and then they do not get benefits under section 80C of Income Tax Act. Those who invest in tax saving funds also do not want to remain in it for more than 3 years. Explain that there is a lock-in period of 3 years. Experts believe that if the investment is maintained for 10 to 20 years, then the investment amount can be compounded on the basis of equity returns and can also help investors to invest a large capital.
Now, with a little data, let us understand why this is so…
Suppose you fall in the 30% tax bracket and are able to save tax of Rs 46,800 under Sections 80C. It also includes 4 percent cess on income tax. You invest Rs 46,000 in it again in a flexi cap fund for a longer period.
Suppose you get an average return of 10 per cent annually on this flexi-cap fund. However, mutual funds do not have guaranteed returns. But according to this, an investment of Rs 1.5 lakh for 10 years in this fund will make you 25.8 lakh rupees.
If this flex-cap fund is an ELSS fund, then you will be able to save Rs 46,800 annually as tax. If you invest this money again in this fund, then you can prepare a capital of 8 lakh rupees. In this way, you can create a total capital of Rs 33 lakh by investing in ELSS fund. By investing in a regular flex-cap, you would get only 25 lakh rupees.
If this amount is invested for the next 20 years, then this amount will increase to Rs 1.3 crore. In this way, you are not only increasing taxes, but also increasing the return on your money so that future needs can be met.
New investors should pay attention to a few things:
1. You can invest in ELSS directly through any fund house or mutual fund distributors.
2. Choosing the right ELSS fund is as important as investing. Seeking the advice of an expert may prove to be a better option for you.
3. You should also pay attention not to invest only on the basis of previous return figures and star-ratings. From the earlier returns of any fund, it cannot be decided that you will perform better in future also.
Also read: From next month, these rules will change with respect to income tax, if not known, loss will be done