Tax. Wealth. Your Savings 20% 10% 30% Save. Build. tax bracket. tax bracket. tax bracket

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1 December 2014 Your Savings by investing in instruments qualifying u/s 80C depends on the tax bracket that you fall in, the savings on taxes vary and range from `15,000 to `45,000 in year Save Tax Build Wealth `15,000 under the 10% tax bracket `30,000 under the 20% tax bracket `45,000 under the 30% tax bracket

2 Contents ELSS Advantage... 3 Case for ELSS... 5 What is ELSS?...13 Decoding savings...14 Alternate tax savers...16 Power of equity...18 The Outstanding Option December 2014 Design: Anil Panwar This booklet has been developed by Outlook Money for the readers of Outlook. Copyright Outlook Publishing (India) Private Limited, New Delhi. All Rights Reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or means electronic, mechanical, photocopying, recording or otherwise, without prior permission of Outlook Publishing (India) Private Limited. Printed and published by Indranil Roy on behalf on Outlook Publishing (India) Pvt. Ltd. Editor: Narayan. Published from Outlook Money, AB 5, 3rd floor, Safdarjung Enclave, New Delhi- 29. The information provided herein is solely for creating awareness and educating investors/ potential investors about rules of investment and for their general understanding. Readers are advised not to act purely on the basis of information provided herein but also to seek professional advice from experts before taking any investment decisions. Outlook Money does not accept responsibility for any investment decision taken by readers on the basis of information provided herein. The objective is to keep readers better informed and help them decide for themselves. Invest in equity-linked saving scheme, save tax and enjoy growth on your investments over the long term INITIATIVE FROM HDFC MUTUAL FUND 1

3 This is that time of the year when most salaried people are busy struggling with colleagues from the accounts department pushing for submission of tax-saving investment proofs. Combining tax savings and wealth creation needs planning and an awareness of how money can work for itself. When it comes to tax-saving options, there is plenty to choose from such as PPF, insurance policies, provident fund and equity-linked saving schemes (ELSS). The sooner you start investing in ELSS, the easier it is to accumulate wealth in the long run. Not only do investments in this product save taxes, it also earns good returns and builds wealth in the long run. The ELSS Advantage For the uninitiated, ELSS is a type of mutual fund investment that qualifies for tax deductions. It is like any other mutual fund, but invests at least 80 per cent of its assets in equity and equity-related products to qualify for tax deductions under Section 80C of the Income Tax Act. ELSS schemes are typically open-ended. Investors can subscribe to the fund on any day. These investments come with a three-year lock-in and the returns from the scheme, i.e. dividends and capital gains, are tax-free. With markets on a high, investments in ELSS to save taxes could just turn your wealth creation dream into reality. 2 INITIATIVE FROM HDFC MUTUAL FUND 3

4 Case The for ELSS There are several factors that work for ELSS compared to other tax-saving options under Section 80C, but the one that stands out big is the equity exposure that it offers. Unlike other tax-saving options, which have either no or little equity coverage, ELSS is the only option with significant equity exposure of more than 80 per cent, which makes it at par with any diversified equity fund. The added advantage of the three-year lock-in with investments makes it the tax-saving option with the shortest lock-in. There are several other inherent advantages with ELSS that makes it a preferred choice among tax-saving options. 4 INITIATIVE FROM HDFC MUTUAL FUND 5

5 1 Diversification equities. Diversification ELSS being an equity mutual fund is well diversified, making it a suitable option for every investor looking to save taxes and also invest in is a simple philosophy that rests on the fact that all investments don t do well simultaneously. An equity mutual fund provides instant diversification because the money invested by a fund is spread across different investments such as companies from different sectors across market capitalisations. 2Lock-in ELSS has the shortest lock-in of three years under Section 80C, which makes it the most liquid among tax-saving options. In comparison, the fixed return PPF has a 15-year lock-in with the flexibility of partial withdrawals from year six. One can borrow against the PPF, but it still does not match the short lock-in that ELSS offers. Even other tax savers such as insurance plans have long tenures and so does the mandatory provident fund deduction. If liquidity is priority while saving tax, ELSS is a go-to option. 6 INITIATIVE FROM HDFC MUTUAL FUND 7

6 3Flexibility from your There is a natural convenience built into investing in ELSS: You can invest by filling up a simple form or even online with direct debit bank account. Like other mutual funds, you can invest dilligently through SIPs, which help you stagger your investments. Most importantly, you can invest small sums through the year instead of investing large sums at one go. Likewise, at the time of redemption, you need not redeem all the units after the lockin, you can cash-in as much as you need and let the rest stay invested. 4Equity exposure underrated benefit of ELSS, Compared to other options available under Section 80C, ELSS is the only equityoriented tax-saving option. This is perhaps the most especially when taken into account the fact that equity is the only asset class that beats inflation in the long run and builds real wealth. This factor alone makes the case for ELSS that much stronger than other available options. Of course, like every other equity instrument, an ELSS also runs the risk of market volatility and loss. Over the long term, these risks are reduced. 8 INITIATIVE FROM HDFC MUTUAL FUND 9

7 5Tax-free returns for tax Investments in ELSS have dual tax benefits. First, investments of up to `1.5 lakh in a financial year qualify deductions under Section 80C of the Income Tax Act. Second, after the mandatory three year lock-in, the gains from the investments are taxfree. Further the dividend income earned on ELSS investments is also tax-free. The beauty of investing in ELSS is that the job of making investments on your behalf in equities is left with experts. These experts professionally manage the funds to optimise returns. 6Transparent Investments in ELSS are open, in the sense, each month the AMC releases the portfolio in which the fund has invested for one to know the type of stocks which their investments are in, the sectors, and the exposure in debt and cash. Mutual funds are regulated by the stock market regulator SEBI, which mandates the release of daily NAVs of the fund, indicating the value of one s investments each day. While the lock-in is applicable for three years, one can still track the performance of their investments in these funds. 10 INITIATIVE FROM HDFC MUTUAL FUND 11

8 7Real-time management ELSS takes the difficult aspect of managing equity investing from you. There are scores of firms and sectors to track and several factors that impact the economy and markets. For instance, a change in interest rates will impact stock prices of companies of certain sectors that are rate dependent. The role of professional fund management ensures you do not face the task of making decisions. Mutual funds employ professionals who manage investments on a full-time basis with expert research resources. The cost of professional management is shared mutually among all the investors in a fund. What is ELSS? ELSS schemes are floated in accordance with ELSS guidelines issued by CBDT under Section 80C of the Income Tax Act 1961 to provide tax savings on investments in equities. The amount you invest in ELSS is deducted from your taxable income. This way, you lower the amount of income tax you need to pay. The investment limit has gone up to `1.5 lakh this financial year from the earlier `1 lakh. 12 INITIATIVE FROM HDFC MUTUAL FUND 13

9 `15,000 under the 10% tax bracket `30,000 under the 20% tax bracket `45,000 under the 30% tax bracket Your Savings Depending on the tax bracket that you fall in, the savings on taxes vary and range from `15,000 to `45,000 in a year by investing in instruments that qualify u/s 80C 14 INITIATIVE FROM HDFC MUTUAL FUND 15

10 Alternate Tax Savers There are several financial instruments in savings and investments that qualify for tax deduction under Section 80C. These include provident fund, PPF, premiums towards life insurance policies, NSC, ULIPs, bank FDs with 5-year lock-in, home loan repayment, tuition fees for children with limits besides ELSS. While some of these are mandatory for salaried people like PF, some options are expenses in nature such as fee towards education of children. Among investments, the ELSS can be compared to PPF and the NSC, where one has the choice to invest of their own accord. ELSS and the rest Minimum investment (`) Lock-in years Returns (%) Tax treatment Public Provident Fund (PPF) % Interest tax-free Low National Saving Certificate (NSC) % Bank FD with 5-yr lock-in 1, % Senior Citizens Savings Scheme (SCSS) 1, % Equity-Linked Saving Scheme (ELSS) Marketlinked Interest income taxable Interest income taxable Interest income taxable Dividend and capital gains tax-free Risk profile Low Low Low High 16 INITIATIVE FROM HDFC MUTUAL FUND 17

11 Figure in ` The power of equity If you invested `70,000 each year in PPF, representing tax-saving debt options from March 1994 when the return on PPF was 12 per cent till March 2014 when the return was 8.7 per cent, `14.7 lakh would be worth `38.7 lakh at an annualised 8.8 per cent return. In the same period, if you invested in Nifty, representing equity investments, the corpus would be worth `57.2 lakh at 12 per cent annualised returns. 60 lakh 50 lakh 40 lakh 30 lakh 20 lakh 10 lakh Nifty: 62.7 lakh Nifty: 42.2 lakh On March 31 Nifty: 57.2 lakh PPF: 25.6 lakh 0 PPF: 11.3 lakh PPF: 38.7 lakh Source: Based on internal calculations Smart Way to Tax Saving The short lock-in of ELSS makes it a convenient instrument to create a cyclical investment plan, which can go a long way Wheel effect Suppose you make investments of `1.5-lakh under Section 80C by investing in an ELSS for three consecutive years. In the fourth year, you have the right to redeem the first year s ELSS investment, which will be tax-free. This sum can be re-invested as fresh investment on which deductions can be claimed. This way, without committing fresh capital, you will have a longterm, tax-saving cycle. You set a continuing taxsaving mechanism in an ELSS that not just saves you taxes but also frees you from making any fresh investments after the initial three years. 18 INITIATIVE FROM HDFC MUTUAL FUND 19

12 Income stream The same logic of investing in an ELSS for consecutive years can be used to create tax-free income streams after the mandatory three-year lock-in. The short threeyear lock-in in an ELSS can be used gainfully to create an income stream in later years and also save taxes. Just like the Swiss army knife, which has multiple benefits, an ELSS too has several advantages. It is a tax saver, investment option and can turn into an income stream. No other tax-saving option comes close to the benefits an ELSS offers, making it not just an ideal tax-saving instrument but also a possible first mutual fund scheme that one could consider investing in. Disclaimer As part of its Investor Education and Awareness Initiative, HDFC Mutual Fund has sponsored this booklet. The contents of this booklet, views, opinions and recommendations are of the publication and do not necessarily state or reflect views of HDFC Mutual Fund. HDFC Mutual Fund does not accept any liability arising out of the use of this information. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them Mutual fund investments are subject to market risks, read all scheme-related documents carefully. 20 INITIATIVE FROM HDFC MUTUAL FUND