Questions to ask before investing in tax-saving schemes

The looming deadline to invest in tax-saving instruments can cause several investors to make desperate last-minute tax-saving attempts. This can, unfortunately, cause poor judgement for many leading to missed appropriate investment opportunities which can help to grow their wealth along with tax savings. It can also create unnecessary strain on your wallet to gather the required funds (Rs.1.5 lakhs) at the last minute for availing of the tax benefit under section 80 C of the Income-Tax Act.

This last-minute make-shift approach may not serve the purpose of making your investments work for you.

Investing on time will give you adequate opportunity to achieve your financial goals and also cater to your tax-saving needs.

Questions to ask yourself before you finalize on a tax saving option:

1. What are the Different Tax Saving Avenues?

There are several instruments u/s 80C of the Income Tax Act that can help in tax-saving. From traditional fixed income instruments such as PPF, NSC, Post Office Time Deposits, NABARD Bonds to market-linked options such as ELSS or ULIP. While traditional instruments have longer lock-in periods, market-linked instruments such as ELSS has a lower lock-in and potential for market-linked returns.

Agencies

As you see in the table above, ELSS combines the flexibility of a lower lock-in and the potential for long term wealth creation.

2. How does an ELSS help you with your tax-saving and wealth-creation goals?

ELSS or “Equity Linked Saving Scheme” as the name suggests, are mutual funds that invest a minimum 80% of the portfolio in equity and equity-linked instruments. Like other options u/s 80C of the income tax, investments done in ELSS Mutual Funds offer tax exemption up to Rs.1,50,000 from your taxable income. Therefore, you can save up to Rs 46,800 in a year by investing in ELSS Funds provided you are in the highest tax bracket. Let’s see how you can save this money with the illustration below:

Thus, with an ELSS you not only save tax but also avail potential for wealth creation in the long-term due to the equity component.

3. Who Should Invest in ELSS Funds?

Since ELSS is an Equity Investment, it is suitable for investors with a high-risk appetite.

Thus, it could be suitable if you have a long-term investment horizon. Since ELSS invests in stock markets through equities, you can navigate the near-term market ups and downs by staying invested for the long term.

4. Why the current market is a right time to invest in ELSS?

As the market levels are facing ups and downs, now is a good time to plan your long-term equity allocation with an ELSS scheme and benefit from tax savings.

5. How to Invest in an ELSS?

You can invest in an ELSS with flexible options of SIP (Systematic Investment Plan) or lumpsum investment mode. With a lump sum, you have the flexibility of withdrawing once the lock-in period of three-year ends. However, with an SIP, each SIP gets locked in for three years and you will only be able to withdraw the first SIP that will get unlocked after 3 years.

If you are not comfortable with investing entire lumpsum at one point and want to spread the risk, SIP (Systematic Investment Plan) is the way to go for you. With an SIP, you get the benefit of investing in a fund across business cycles and the benefit of Rupee cost averaging. Whichever option you choose, make sure to stay invested for the long term to get the opportunity to build wealth and achieve your financial goals.

So, don’t wait till 31st March, start investing in ELSS Mutual funds right away with Quantum Tax Saving Fund.