According to most of the financial planners, tax planning is the most important aspects of financial planning. Disclosing the current income and paying the appropriate taxes based on the income is the responsibility and duty of a citizen of any country.
In India, a tax payer is also allowed to claim tax deductions under various sections of Income Tax Act. One of the Sections, 80C of Income Tax Act 1961 allows the tax payers to claim deduction of up to Rs 150,000 in a financial year (those who follow old tax regime) from their taxable income by investing in schemes eligible for tax saving in this section. ELSS is one of the eligible schemes under Section 80C of The Income Tax Act 1961. ELSS Funds are also known as tax saving mutual funds.
However, there are also some other Sections in Income Tax Act under which further tax can be saved and we will discuss that below –
Benefits of tax planning
- Tax savings: Other than Section 80C, Section 80D, Section 24 etc. are sections for tax savings. Needless to mention, saving taxes means more money in your hands. Over a period of time, it can result in substantial financial benefits for the tax payers. For example, under Section 80C you can save up to Rs 46,800 in taxes every year. Over your earning career of approx 30 – 35 years, the total tax saving can amount to a significant corpus due to superior return and power of compounding through ELSS Funds.
- Inculcate savings habit: Planning for taxes also maximizes tax savings through saving habits. You can acquire this saving habit if you invest in ELSS mutual funds through SIP. SIP helps you invest in mutual funds a fixed amount for a fixed tenure of your choice and also in the scheme of your choice. ELSS can be a choice of scheme for tax saving.
- Wealth creation in the long term: ELSS has significant wealth creation potential in the longer term as ELSS mutual funds invests in a diversified stock portfolio of different industry and market cap segments. ELSS as a tax saving scheme has given very good returns over long investment horizons in the past. ELSS funds as a category has given over 19%, 13% and 14% annualized returns in the last 3, 5 and 10 years respectively (Returns as on 20/08/2022, source: www.advisorkhoj.com). As you can see that these returns are much higher compared to other tax savings options such as PPF, NSC and tax saving FD of banks.
- Link tax planning with your financial goals: Saving taxes just does mean investing some money, it is more than that. For example, if you are investing in ELSS funds, you can actually link the investments with your different financial goals and thus get the twin benefits of tax saving as well as reaching your financial goals.
- Easy liquidity – ELSS is one of the most liquid 80C investments as it is locked-in only for 3 years compared to 15 years in PPF and 5 years in NSC and bank fixed deposits.
ELSS is the most efficient mutual fund schemes if you are saving taxes. It is tax efficient too as capital gains arising out of your ELSS investment is subject to long term capital gains taxation. Long term capital gains of up to Rs 1 lakh in a year is tax exempt and taxed at only 10% thereafter.
