SIP in ELSS - a good way to save taxes right from the start of the financial year

My article on the highlighting the benefits of starting early in the financial year to plan for saving taxes ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/13042015/13042015-md-gm-11.pdf

The English translation is as under:

Someone has aptly said, “If you want to sell something to a man, tell him there is a tax benefit.” We all love to save tax, even if we have to spend more than the tax saved, sometimes. Well, on a serious note, in order to promote a certain behavior the Government offers some incentives in form of tax rebates.

One such incentive is in the form of tax deduction under Section 80C of the Income Tax Act. Among other alternatives eligible under this section, we covered ELSS in one of our earlier articles. We would like to repeat the importance of this investment vehicle. Someone may think, why now? Shouldn’t we worry about the tax saving in the end of the year?

Well, we have observed over the years that the tax deductions from salary start towards the end of the year as the companies assume the employees would (and should) take their time to plan out whether and how to save taxes.

We think, some simple things are possible to start doing. All of us know the limit under Section 80C of the Income Tax Act is Rs. 1,50,000 per year. We all also can estimate the PF deduction, our annual insurance premium amount, etc. Based on this, it is easy to arrive at the limit available for other avenues, of which ELSS is one.

If you have made your overall financial plan – either yourself or with the help of a professional – you also know how much contribution you need to make towards equity investments.

Let us assume that you have the entire limit of Rs. 1,50,000 available for ELSS and your financial plan also requires that you invest that much in equity for the year.

Given that, it is easy to invest a sum of Rs. 12,500 every month into ELSS rather than putting a sum of Rs. 1,50,000 at one go. First of all, one may not have that much saving in one go. Secondly, putting a large sum in one transaction carries the risk of entering the stock market when the prices are high. As against that, the same also may provide an advantage if the entry happens to be at a very low price. Should one take that risk? Is it prudent? If one has a reasonable knowledge to identify market tops and bottoms, the strategy to invest in one go might be a good idea; if not, it could be disastrous.

Most of the retail investors do not have the skills to know if the market is currently high or low. With that limitation, it is prudent to spread one’s investments. In one of the earlier articles, we also talked about systematic investing and its benefits.

Combine the above points and the picture is clear. We are recommending that one may consider investing systematically in ELSS schemes through SIP. Starting this process in April reduces the burden at the end of the year. Such a strategy allows one to invest in equity, spread the investment monthly and thus reduce the burden, take the advantage of price fluctuations in stock markets and avail the tax benefit – all through one simple plan.

However, one needs to keep a few things in mind. One, ELSS is an equity linked savings scheme. Please understand that you are investing in equity markets. Go with proper understanding. Two, units of ELSS schemes are locked-in for three years from the date of allotment. Hence someone investing in ELSS through SIP route must understand that each investment would be locked in for three years from the respective investment date. The lock-in does not end three years after the first investment for all your units.

Plan to save taxes, start as early as possible and have a wonderful 2015-16 ahead.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.