An efficient investment product is one in which the total cost of investing through that product stays low. This includes the tax outgo. Equity as an asset class is gaining even more popularity and a tax-efficient product to participate in this asset class is an equity-linked saving scheme (ELSS).
ELSS is among the products that fall under the Rs1.5 lakh deduction allowed in Section 80C of the Income-tax Act, 1961.
How Is ELSS Taxed? Till financial year 2017-18, there was no tax on capital gains from equity and equity MFs older than one year. However, from April 1, 2018, equity fund investors have to pay 10 per cent long-term capital gains (LTCG) tax on profit above Rs 1 lakh per annum. This means that the gains made on ELSS investments will attract LTCG tax when you redeem your units if the net gains from equity and equity MFs in all cross Rs 1 lakh in a financial year.
If you have multiple equity investments, say, as direct equity, ELSS and other types of equity MFs, if you sell any of these and make a gain that is in all more than Rs 1 lakh in that financial year, then there is LTCG of 10 per cent on the gains.
Tax efficiency: For those in the higher tax brackets, an LTCG rate of 10 per cent is much lower than their income tax rate of 30 per cent-plus. Therefore, ELSS offers higher tax efficiency. Some of the other tax-saving options, however, either give tax-free returns or add the returns to the income of the investor.
How to invest? You can either invest in ELSS via systematic investment plans (SIPs) or lump sum amounts. SIPs enable regular investment, which is convenient for many investors, and help average out the market volatility and returns. When the markets are high, the investor ends up buying fewer units, but when the markets are low, more units get allocated, resulting in an averaged out set of returns over the longer term. However, each SIP installment will have a three-year lock-in period, which makes a lump sum withdrawal difficult.
However, the fact that ELSS comes with a lower lock-in compared to most other tax-saving products and provides a pure stock market play makes it an attractive option if you are looking to fulfil long-term goals.