Monday, December 7, 2009



You are sure to be bombarded with ads of Tax Schemes in the coming days as the 'Tax Season' draws near. ULIPs & ELSS will be the prominent ones who will be eyeing your wallet.
My advise, Go for Mutual Funds ELSS. Among all Tax Saving instruments, ELSS stands out. Not only your Investments into the ELSS is tax free, but also the dividends you earn and also the returns at maturity are also tax free.

It is proven beyond doubt that among all the Tax Saving Instruments, Equity Linked Savings Scheme, popularly known as ELSS, the returns from ELSS have been the highest.

What is ELSS?
ELSS is the acronym for Equity Linked Savings Scheme. It is basically a diversified equity scheme, which has a 3-year lock-in period. They are linked to Stock Market Returns, hence though volatile, the returns tend to be higher than traditional Tax Savings Scheme.

Why ELSS :
1. Investors in ELSS under Dividend Payout Option have the advantage of getting Tax Free gains even during the lock-in period of 3 years.
2. Lowest Lock-in period of just 3 years, comparing favourably with maturity period of NSC (6yrs) and PPF (15 years).
3. Minimum investment is only Rs.500., very low entry barrier.
4. Investors in ELSS have the advantage of investing through Systematic Investment Plan.
5. Some ELSS schemes offer Free Life Insurance Cover and also Personal Accident Death Cover and even Critical Illness cover!!!
6. Historically, provided better returns than both NSC, PPF and ULIPs.
7. Profits earned after the Lock-in Period is Competely Tax-Free.
8. Upto Rs.1Lakh is eligible for deductions under Section 80c compared to Rs.70000 in PPF.
9. Due to its 3 year lock-in period, the Fund Manager has the freedom to invest in Fundamentally Strong Shares with huge future potential and can afford to 'wait' to unlock the value. Thus, it has been observed that ELSS schemes do beat (in terms of returns) even Diversified Mutual Funds more often than not.

Why NOT other Tax Saving Instruments :
1. ULIPs or LIC Premium :
These Instruments are designed to provide you Cover, which invest only a PART of your invested amount. Moreover the Entry load in some of these can be as high as 40%., where as in ELSS , it is NIL!!!!!
2. PPF and NSC :
Not only the Lock-in period is high, but also the returns are very less, hitting you hard and sometimes not even covering Inflation.
3. Five Year Bank Fixed Deposits :
Very Low Returns, Low Liquidity and Interest IS Taxed on Maturity.

Birla Sun Life Tax Relief and HSBC Tax Saver Equity are offering free critical illness cover, while DWS Tax Saving is giving free life insurance.
The Reliance Tax Saver and Kotak Tax Saver scheme comes with a free life insurance cover.
Taurus Tax Shield and Principal Personal Tax Saver and Prinicipal Tax Saving Fund offer Personal Accident Death Cover.

Apart from the ELSS Funds, there are Pension Funds namely, Templeton India Pension Plan and UTI Retirement Benefit Unit Plan, which invest a minimum of 60 per cent of their assets in fixed income instruments.

Systematic Investment Plan

Best way to invest in ELSS is through Systematic Investment Plan(SIP). With SIP you can invest a small amount every month for a specific time period. With SIP investor can take advantage of fluctuations in the stock market. So investor will get more units when the market is down and get less units when the market is up. For eg if you are investing Rs 1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10 and will get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover the market fluctuations by rupee costs averaging.
SIPs are a tried and tested method of minimizing risk and yet enjoying good returns,by regular,periodic investment,over a long horizon.

SIPs along with the tax benefit that can be availed of by investing in ELSS,makes this investment option very attractive.Instead of simply putting in a chunk of Rs 1 lakh at the end of each fiscal year, if you develop a healthy saving habit,you could invest a fixed amount every month and benefit from the advantages of both SIPs and the tax rebate.
When you invest in ELSS, through the SIP route, you enjoy the multiple benefits of better market-linked returns in the long run, rupee cost averaging and a tax break. So, happy investing!


ELSS give you the two-in-one advantage of saving tax and wealth-building. So, do not wait for the "March" last minute rush to save taxes and make a hasty decision.

Tax Exemption twice in 6 years!!!
You can withdraw your Tax Saver Funds at the end of the 3 years and when you reinvest the same, you get Tax Exemption TWICE in six years compared to just once in the case of NSC.

Almost all equity-linked saving schemes have two fund options — growth and dividend. Unlike a growth plan, an investor gets annual payouts from the dividend schemes before the final redemption of units.

The trick here is to invest in the dividend plan of an ELSS. For instance, if one invests Rs 1 lakh in an ELSS, one saves a tax outgo of Rs 33,990 (at the highest tax rate of 33.99 per cent) under section 80C.
Now consider this. An ELSS has announced a dividend of 50 per cent. The net asset value (NAV) per unit of the scheme is Rs 50. Suppose one invests Rs 1 lakh in the fund before the record date for the dividend. After the record date, the investor will get a dividend of Rs 10,000 at the rate of Rs 5 per unit for 2,000 units that have been bought. Therefore, effectively the individual invests Rs 90,000 (Rs 1,00,000 minus Rs 10,000) and saves Rs 33,990 in tax outgo.

In other words, on an investment of Rs 1,00,000 in the dividend plan of the ELSS, one gets a post-tax return of Rs 43,990 (Rs 33,990 plus Rs 10,000), or 43.99 per cent.

Religare Tax Plan
Birla Sunlife Tax Relief 96 Fund
Sundaram Tax Saver
HDFC Tax Saver
Franklin India Tax Shield
CanRobecco Equity Tax Saver
Fidelity Tax Advantage
SBI Magnum Tax Gain

For more details on My Pick of the Best ELSS Funds, look out for my next article.

Best of luck,
Srikanth Matrubai

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  1. Well written post!! I feel like cursing myself for not educating myself enough.Invested in a ULIP in a hurry to save tax.I realized the mistake soon:-(
    The premimums are high and i need to continue investing for the complt 3 years to see any benefits.
    I now figure that ELSS would have been a better option

  2. Great information provided in a simple language. I did the mistake of investing in ULIP and now I am stuck with it for next 3 years. I believe investing for a long time is better than investing in for just 3 years. What's ur say

  3. You are of course, right Vibhor. but, sadly, you learnt the truth after losing money.

  4. What can i say. A great startup guide for any individual. I however could not understand the logic behind going for Dividend as opposed to growth option. Wont growth be a more disciplined and better approach. Could you elaborate with a similar example for growth and point out where exactly one loses out.

  5. nice blog..i have started earning for past 3 months..and i came across this blog..i guess at the correct time :)
    but i couldn't understand difference between growth and dividend one..also how should i select ELSS funds out of the 8 funds u have listed?
    pls reply


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