Financial Year 2002 is in its last quarter. Its time for investors to take some time out from their schedules and start planning for taxes. The Equity Linked Saving Scheme (ELSS) is one tax-saving investment avenue that investors may want to look at now.

Investors first need to understand a few fundamentals about ELSS products before they invest in them. We take this opportunity to answer a few ELSS-related queries for our investors.

1. What is an ELSS?

   An ELSS  equity-linked saving scheme, is an equity fund. It works like any other open-ended equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation (dividends) for investors. The only difference between an equity fund and an ELSS is that the latter has a 3-year lock-in and tax benefit.
    

2. Why do I need to lock-in my funds for three years?

   ELSS products have a 3-year lock-in. It is built in the structure of the scheme. It is not something that the mutual fund imposes on its investors, rather, it's a requirement imposed by the Central Board of Direct Taxes (CBDT). Moreover, a lock-in is associated even with other tax-saving products like public provident fund (PPF), national saving certificate (NSC), infrastructure bonds and insurance. In fact, the lock-in for ELSS is lowest when compared to other tax-saving products like PPF, NSC, bonds and insurance.
    

3. What tax benefit will I get by investing in ELSS?

   Investments in ELSS are eligible for tax benefit under section 88. There is a ceiling of Rs 10,000 for availing the benefit. In other words, out of the Rs 60,000 investment limit for tax rebate under section 88, an investor can invest upto Rs 10,000 in ELSS. With an investment of Rs 10,000, an investor will earn a rebate of Rs 2,000 i.e. @ 20% of amount invested.
    

4. Can I invest more than Rs 10,000 in ELSS?

   Yes, you can invest more than Rs 10,000, but you will earn a rebate of Rs 2,000 only.
    

5. What are the advantages of investing in an ELSS?

   ELSS is the only equity-linked product (apart from the single premium insurance bond) that allows the investor to take an exposure to equity markets. Several studies have revealed that over the long term, equities have outperformed other investment avenues like bonds, fixed deposits, gold and real estate. So an ELSS can be more rewarding and could really boost your investment portfolio.
    

6. Is ELSS meant for me?

   If you are less than 40 years old, an ELSS fits particularly well in your risk profile. Equities outperform other investments over the long run (3 years in this case), so younger investors can take advantage of this as they have time on their side. Even if you are older and risk-averse, you could invest smaller amounts in ELSS.
    

7. Equity markets can be volatile at times. Won't this affect my ELSS adversely?

   Investors must understand that ELSS is not like other equity products. Its superior due to the tax benefit under section 88. With a Rs 2,000 tax benefit (on a Rs 10,000 investment), your investment has earned you Rs 2,000 on an effective investment of Rs 10,000. If markets firm up, your rate of return could increase considerably. Besides, with an ELSS you are forced to take a 3-year view on equity markets and short-term volatility has negligible impact on your investment.
    

8. Is now the right time to invest in ELSS?

   There may not be a time better than now. Equity markets are very low right now. Investors who invest in ELSS now will benefit from this and will enter at very low NAVs. With a 3-year outlook, an ELSS is particularly attractive at this stage.
    

 

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