Tax Planning Benefit
For how many years will I get the tax benefit by investing in an equity-linked saving scheme?
The tax benefit under Section 80C (exemption from income tax for investments in ELSS and other instruments) for investments of Rs 1 lakh is applicable for only one financial year. It's applicable only for the year in which the investment is made. So if you invested Rs 20,000 in a tax planning fund in FY 2006-07, you cannot use this to avail a tax breather for FY 2007-08, even if you didn't use the benefit in 2006-07.
Capital Gains on ELSS
What is the tax payable on profits of an ELSS fund after the three-year lock in period?
Zilch! You don't pay any tax on the capital gain at the end of the three-year lock in.
However, if these tax provisions change in the future, you may be in for a surprise.
No Limits
Can I invest in tax planning funds even though I have exhausted the Rs 1 lakh limit?
Yes, you can. However, given the three-year lock in, it makes more sense to invest in an open-ended, non-ELSS diversified equity fund. In case of a change in fund management, slackened performance, poor market conditions, emergency requirement of money etc. one has the option of redeeming units. Moreover, when it comes to picking a good performing fund, investors today are spoilt for choice.
So it is better to avoid a restriction of a three-year lock in on your investment.
This article was originally published on December 18, 2007.
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