Equity Linked Saving Schemes (ELSS)

Features:

• Individuals, Hindu Undivided Families (HUFs) and companies.
• The units can be easily transferred by filling out a transfer form.
• A maximum investment of Rs 10,000 to claim an income tax rebate of 20 per cent.
• Nomination facility is available with ELSS.
• Open-ended mutual funds have no maturity period. However, to claim tax rebate under Section 88, the minimum lock-in period is three years.
• In the case of open-ended schemes, the units can be sold anytime after the initial lock-in period of three years. In the case of closed-end schemes, the units can be sold only on the due date specified.

Tax benefits:
Dividends from mutual funds are fully exempt from income tax under Section 10(33). Equity funds (schemes that invest 50 per cent of their funds in equity) are also exempt from dividend tax.

ELSSs offer under section 88 tax rebate on investments up to Rs 10,000 in a financial year. The difference between the selling price and the cost price is taxable as capital gains in the year of sale, at 10 per cent or 20 per cent, depending on whether or not you claim indexation benefits.

Pluses

• Possibility of high returns
• Lock-in period of only three years
• Easy transfer
• Low tax incidence (10 per cent) on redemption
• Efficient service, especially in the case of private mutual funds

Minuses

• High risk
• Difficult to choose the right fund (But not if you use the services of the Matchmaker!)

How to start?
It’s a pity that you can only invest up to Rs 10,000 to claim the maximum tax rebate under Section 88. However, stay away from ELSSs if you cannot stomach the risk.

You can also consider withdrawing from the PPF scheme and investing your money in tax-saving mutual fund schemes. Of course, you cannot reinvest the money that you withdraw. But you can channel this money towards other financial obligations and invest in ELSSs using your taxable income for the year.