Axe the tax!! Time to Act

As soon as realization hits that a new year is upon us, there is another one that lurks around the corner. And that is the start of a new financial year. Which means, you have till March 31 to complete your tax planning exercise? So if you have not completed your investments under Section 80C, you have a little more time to get your act together.

If one takes a look at the past year, what would seem more appealing would be the fixed return instruments like National Savings Certificate (NSC) and Public Provident Fund (PPF). After all, at least you are guaranteed a positive return there. The equity markets are in the doldrums and don’t look like they will be reviving anytime soon. But what investors tend to forget is that investing in equity is not a short-term investment. Even though equity has the potential of delivering phenomenally over the short term, the risk of capital erosion is also very high. To truly benefit from equity, one should have the patience to stick around for at least three years. But the ease of exit makes it virtually impossible for the investor to curb the natural instinct for flight in times of crashes. One mistake is to offload all shares and run when the market heads for a downturn.  

The other is choosing to avoid equity altogether till a recovery is on its way. The truth is one can never really say when the market is going to make a U-turn. But if one gets into the market with the intention of hanging on for a while, it will eventually pay off.

The good thing about an Equity Linked Savings Scheme (ELSS), is that it has the lowest lock-in period when compared to the other options under Section 80C. The minimum period of three years ensures that the investor puts in money that he will not need for a while. The other options start at a minimum of five years.

If we look at the ELSS category over the past five years, on an average it has delivered annualized returns of more than 12 per cent. This is much higher than the returns you will get on the other instruments under Section 80C, which will average between 8 and 9 per cent. The tax implications are also luring. You get a tax benefit when you invest in an ELSS scheme, dividends are tax free and when you sell the units after three years, you pay no tax (long term capital gains tax is nil). This makes it score higher than bank fixed deposits and the NSC. And, in terms of returns and lock-in, it scores over the PPF too.