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The Best Tax Saving Option

The ELSS fund category is the only tax-saving option with a significant gain potential...

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This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to

The ELSS funds find a special position among the instruments in which savings and investments, up to Rs 1 lakh in a financial year, qualify for tax deductions under Section 80C of the Income Tax. This is the only pure play equity investment option available compared to the otherwise fixed return, fixed tenure options. Investments in the ELSS come with a 3-year lock-in, and offer tax free redemption after the 3-year term. This category also happens to be unique as it is the only category in which investments are open to only retail investors and HUF.

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The funds in this category are managed like any other diversified equity fund, and they can have different market capitalisation exposure. For instance, of the 37 funds in the category, 22 are large- and mid-cap funds, 10 reflect a multi-cap approach, 3 are large-cap funds and 2 of them are mid- and small-cap funds. This variation gives investors the choice to select a scheme that best suits their risk comfort..

The 3-year lock-in allows fund managers to manage these schemes without constant redemption pressure. The average number of stocks held by the category is 43, with DSPBR Tax Saver holding 91 stocks, the most for a fund in the category, and Religare Agile Tax, with just 11 stocks, being the smallest portfolio.

Make the most from ELSS
One of the merits of investing in an ELSS fund is that it instils investment discipline among equity investors. The 3-year lock-in ensures this tax saving option is not treated as an opportunity to make a quick exit the moment one sees profits. Considering the Finance Minister's budget speech, there is no committed deadline for introduction of the much-talked and awaited new tax code or the DTC. The future of ELSS funds is still bright.

The other advantage of ELSS schemes is in their tax treatment being unlike the NSC or the 5-year bank fixed deposit. Although the savings in these fixed return investments qualify for tax deductions under Section 80C, the interest earned in them is treated as income and taxed accordingly.

The short lock-in ELSS has the potential to become an effective and perpetual tax free, tax saving option. For instance, if a taxpayer invests Rs 1 lakh for three successive years, in the fourth year, the first year's investment would complete the mandatory 3-year lock-in. This could be redeemed and reinvested, which would in turn be effectively leaving additional money in the hands of the tax payer.

This exercise assumes that the performance of the fund will be profitable, which it may not be. Even so, adopting such a tactic would definitely reduce a taxpayer's liability.

To check the veracity of such a profitable proposition, we looked at how investments in SBI Magnum Taxgain, one of the oldest funds in the category with the highest assets, would be over a 20-year span with Rs 1 lakh invested in this scheme on March 31 each year from 1993.
* If you had stayed invested in this scheme, the Rs 21 lakh invested would be worth Rs 1.97 crore and we are not even considering the tax savings this investments offers

This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to

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