We all think about lots of ways to save tax. Isn’t it? Here is a way to get double profits by not just minimizing your taxes but getting capital appreciation profits also. ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C to the holders.  It is just like other tax saving instruments like National Savings Certificate and Public Provident Fund. Since 65% of their corpus is invested in stocks this fund is qualified for tax exemption under Section 80C. Lets us discuss the criteria to gain tax benefits of Equity-linked saving schemes (ELSS) . Investing in ELSS? Do keep the following points in consideration:

• Minimum tenure of investing in an ELSS is 3years no benefits can be availed if they are redeemed before.
• One cannot avail benefits by investing on behalf of a minor as it is done in case of LIC.
• Minimum Investment to made is Rs. 500
• No limit is imposed on maximum investment but the deduction to the extent of Rs. 1,00,000 can only be claimed under 80C
• Dividend and capital gains on ELSS is tax-free.
• Highest risk is associated with ELSS.
• The tax benefit is given to the one who invests in ELSS and this benefit cannot be transferred to other parties.
• It is suitable for investors having a high risk profile as returns in ELSS fluctuate depending upon the equity market and there are no fixed returns.
• ELSS schemes are open ended, i.e., investors can subscribe to the fund at any day.
• NAV or the price of the fund is declared on every business day.

If you jointly want to apply for an ELSS scheme only the first holder is entitled to tax benefits under Section 80C of the IT Act. There is no compulsion regarding investment in the same ELSS every year. One can invest based on the requirement and preferences. Choosing Criteria of ELSS: Points to remember so that you don’t end up puzzled:

• Look for higher AUM when applying in an ELSS. AUM known as Asset under management is the amount of money the fund is managing. Higher AUM implies that the fund has many investors and has a good reputation.

• If the fund is performing well in the past, it is expected that the fund will keep performing well in the future. Generally past 3yrs 5yrs and 10yrs return of the fund is examined to know the performance level.

• Look for Sharpe ratio of the fund to calculate risk factor of the fund’s portfolio it should always be near 1.

• Avoid funds that have less than three years of track record.

• Avoid funds that have an asset base of less than Rs.300 crore. The fund fact-sheet will reveal this figure which is available for download at the fund’s site.

• Rank all ELSS in decreasing order of three-year returns. Choose one of the top three.

  Options for Investing in an ELSS: a. Growth option – Income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the NAV of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss. b. Dividend option – The fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors. c. Dividend reinvestments option – If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 1000 units of a fund and the fund declares dividend @ 1.5 per unit, the total dividend of Rs. 1500 (1000*1.5) will be reinvested on behalf of the investor as a fresh purchase. The investor can claim deductions to the tune of dividend received which is Rs. 1500 in this case.   Systematic Investment Plan  Monthly investments on pre-specified date is possible through systematic investment plan (SIP). This type of investment is better suited to small investors who cannot invest a lump sum amount. SIP has the benefit of averaging out the cost of investors. As the amount of investment is fixed the units purchases every month varies depending upon the NAV of the fund. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out the cost of investors.  Why to miss a chance to save taxes if we can do it so easily, isn’t it? ____________________________________________________________________________________________________ Feel free to write to us,at [info@taxmantra.com] or call us at +91 88208208 11.