Tax-saving products play an important part in financial planning. While some products deliver fixed returns, equity-linked saving schemes (ELSS) have twin benefits. Besides providing tax-shelter, they offer reasonable returns (of course with risk). Since a major portion of the corpus is invested in equity and equity-related products, there is a risk element. As several mutual fund houses offer these products, one should select a fund house with a proven track record for getting a decent return on investments.

Investment of up to Rs. 1 lakh is exempted from income under Section 80C. There is, however, a lock-in of three years before one can withdraw. There is no compulsion to exit, and investors can stay invested for a longer period. For Rs. 1 lakh invested, investors in 30 per cent tax bracket can get Rs. 30,900 as tax benefit.

The minimum investment is Rs. 500. There is no upper limit, and no tax is applicable on capital gains on redemption. Dividends from the schemes are also exempt from tax.

As traditional tax saving products such as public provident fund (PPF) and national savings certificates have a longer lock-in period and may not offer market-linked return, investors with risk appetite can consider investing in ELSS schemes. The three-year lock-in period helps the mutual fund houses to look at investing in stocks that provide steady appreciation without unduly worrying about the short-term volatility in markets.

Investors can also opt for systematic investment plan (SIP) with a view to reducing the risk. But, under this option, each instalment is taken as a separate investment, and the lock-in period is calculated from that period.

Most of the schemes under ELSS have provided a reasonable return over a three-year period. If tax savings are also taken into account, the returns will be more. Axis Long Term Equity, Canara Robecco Equity Tax Saver, Franklin India Tax-shield, DSPBR Tax Saver, ICICI Prudential Tax Plan, Reliance Tax Saver are among the large number of mutual fund schemes, offering reasonable returns.

It is ideal to stay invested in ELSS even after the lock-in period of three years, as it has the potential to create wealth in the long term. In other words, one should think of ELSS as a long-term investment than just a tax-saving tool.

varadharajan.srinivasan@thehindu.co.in

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