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ELSS For Retirement Planning

Very few people are aware that mutual funds are not only ideal for savings but can also be used for tax saving purposes. ELSS is one such option. It stands for Equity linked Saving Schemes. It is a scheme available under mutual funds and is mainly preferred by individuals to save taxes. Under Section 80C of the Income Tax Act, 1961, ELSS is listed as a tax saving instrument.

One of the main reasons for financial planners to include funds of this scheme in the portfolio is because of its viable lock-in period. As compared to its contemporary tax saving instruments, ELSS does not bind you for a long period and you can withdraw your money once the lock-in period is over, without attracting any extra fee on it. The lock-in period is of a three-year duration for this scheme. After this, this scheme converts into an open-ended scheme. But, it depends on whether it is simply a tax saving instrument for you or whether you want to include it in your retirement planning portfolio.

We would be elaborating upon all the important things that you need to know regarding the same in the sections below:

Why Invest in Equity Linked Savings Scheme for Retirement Planning?

Apart from the aforementioned pointers, the main reasons to the use of this tax saving instruments as a part of the portfolio of your retirement planning include:

Dual Purpose of Taxation and Investment

We cannot reiterate the importance of including an ELSS in your investment portfolio enough. It is one of the best instruments for meeting the dual purpose in financial planning. One of the main reasons why more and more people prefer to invest in an ELSS because of taxation is because it is eligible as a tax saving instrument under section 80C. You can avail a tax deduction of up to Rs. 1.5 Lakh from your total gross income, as mentioned in this particular act. Another thing to note here is that even though you can deduct up to this much amount from your income and save it from taxation, there is no maximum limit for how much you need to invest in an equity-linked saving scheme.

The reason why most people prefer it for investment is predominantly because it is known to provide the highest returns as compared to other options available in the list of tax saving instruments under 80 C. For instance, it gives around two times the returns as compared to a traditional fixed deposit or a public provident fund- two of the other popular options for investment keeping retirement planning in mind.

Diversification of Retirement Fund

We cannot ignore the importance of retirement planning in today’s world. Our country is constantly going through a social and economic transformation and what may cost you a meager Rs.100 today may become a target of inflation. Keeping all of this in mind, having an ideal retirement fund is crucial. In fact, as we advance towards our retirement, we start worrying about the constant flow of finances. However, the earlier you start with your retirement planning, the more stable you would be when you retire.

You must have heard financial planners often mention that you cannot possibly put all your eggs in one basket. It is the same situation with a retirement fund. You should diversify it enough, keeping the volatile nature of the investment market in mind. Most people prefer ELSS because even though the risk is higher, the lock-in period is lesser. So, even if you start investing a little later in your 30s or 40s, you can collect a substantial amount of money in your ELSS fund for your retirement.

ELSS ROI Exceeds Inflation

ROI stands for the return of investment and it is one of the main reasons for financial planners to heavily advise investing in an equity-linked saving scheme. The main purpose of making investments is that it garners positive returns for you. This is done keeping in mind the rate of inflation. As time goes ahead and economies boom, it is inevitable that value of a 100 Rupee note will be lesser than it is today. The main reason for this value to fall will be because of the inflation that is a part of every growing economy.

Easy and flexible investments

Apart from the aforementioned reasons, investing in Equity Linked Savings Scheme has yet another advantage. These investments are not only simple to make but are also flexible in nature. Unlike many other contemporary Systematic Investment Planning alternatives, the amount of investment can be decreased or increased depending upon how much you can invest and how much do you wish to save on your gross income.

Although, there is a minimum requirement of Rs.500 that one needs to invest, there is no set limit on the maximum amount that one can invest in an equity-linked saving scheme. The ideal way to make the most out of an ELSS is by starting out slowly at the beginning of your career. Most people do not need to have an additional scheme to save on taxes and the company’s plans such as Provident fund are enough for them to invest their taxable income.

However, as you continue to grow in your career and continue to earn more, the amount of your taxable income is sure to increase. Hence, in the early years, you can start with a lower amount but as your funds grow, you can decide to keep putting more money to make retirement planning a priority along with your other investments.

Professional management

The reason why we have experts for investing is that it is not everybody’s cup of tea. Each person has their own expertise and if everybody was good at investment, then nobody would ever be grappling with the problem of low funds. It is also difficult for people to afford professional fees when it comes to management of their funds and their investments.

With an ELSS however, one can avail professional management services as some of the most experienced experts are in charge of managing this money. It is one of the best ways to get your funds invested professionally while earning on the same. These managers try all permutations and combinations to ensure that the investors get the highest possible returns on their money.

Tax Benefits

The main reason for ELSS to get so popular is because of the tax benefits it offers. As mentioned in the above sections, ELSS is listed as a tax saving instrument under Section 80C of the Income Tax Act, 1961 in India. Hence, most professionals who keep growing in their careers and have monetary growth, use this particular fund to save on their gross income.

With a substantial amount saved, the tax benefits of ELSS cannot be ignored for the current growth of investment and as a great instrument for your retirement planning too.

Why Should you plan for Retirement

Now that we have mentioned about Equity Linked Savings Scheme as an option for your retirement planning, we can further elaborate on why retirement planning is crucial overall. Firstly, you should know that there is no ideal age for when to start investing for your retirement. The earlier you begin, the more the funds you will have when you retire ensuring that you have a lot more stability.

Now, one of the main reasons for investment for retirement planning is that the compound rates really pay off. The amount you invest would give you better returns, depending upon the time you keep them. The nature of the market is very volatile, hence the longer you keep your investments for, the longer you can reap the benefits of them.

Additionally, we cannot ignore the fact that life is unpredictable. You never know when you would need to retire. If it is even five years earlier than your planning, then you may end up losing out on a substantial investment that you could have made in those five years. Also, with old age, economic problems may become more apparent as there is no fixed flow of money. Medical expenses become more and in general maintaining a certain lifestyle can pose itself as a challenge if there is no fund coming in for the same. Hence, retirement planning is quite important.

More than anything, savings are always considered to be a boon for people. In case, you put all of your money towards your retirement and do not have anything else saved for emergencies, then you can consider using a lump sum from the funds invested towards your retirement planning.

What is Equity Linked Savings Scheme?

While we have explained why an Equity Linked Savings Scheme makes for a great option for retirement planning, it is also important to understand what this particular fund entails in detail.

It gives you a tax deduction benefit for an amount equating to Rs. 1.5 Lakh. It is mentioned under Section 80C and is known as the only equity instrument which can offer Section 80C deduction benefits. While some people see the lock-in period associated with an ELSS as a challenge, they don’t often realize that as compared to the other tax saving instruments, this period is quite beneficial and much shorter as well. In fact, this lock-in period is crucial for you to get good returns because ELSS invests in stocks and the volatility of the market plays a huge role in cost rupee averaging.

Features of ELSS

Being one of the most popular investment options, an ELSS is basically an investment option, which is used by most investors for saving on tax and also for retirement planning. Some of the main features of ELSS include:

  • It is basically a tax saving scheme which mainly invests in a portfolio consisting of diversified stocks.
  • ELSS comes with a lock-in period of three years
  • These types of mutual funds are mainly preferred for tax saving purposes
  • When you need to make an ELSS investment, you would either need to invest Rs. 500 or in multiples of Rs. 500.
  • One can invest in an ELSS through a SIP and also through the mode of a lumpsum.

Benefits of Investing in ELSS

The main benefits of investing in an ELSS include:

  • Saving on tax and getting tax benefits

  • The lock-in period is lower as compared to other tax saving instruments

  • You can inculcate a healthy regular habit of saving and investment so that you get better equipped with financial planning

  • You will not only get ELSS benefits but also have diversified stock listed in your retirement portfolio.

  • You do not need to settle for the lock-in period and you can invest in this fund for a much longer time too

FAQs on Elss For Retirement planning

Can I invest more than 1.5 lakhs in ELSS?

There is no problem with investing more as there is no maximum limit set. However, you can get a benefit of the ELSS and tax exemption for an amount of only Rs. 1.5 Lakhs.

Can I redeem ELSS before 3 years?

You cannot redeem your ELSS before 3 years as that is the mandatory lock in period set for this type of mutual fund scheme.

How can I invest in ELSS through SIP?

You can choose an ELSS scheme of your interest with a certain amount going every month, quarter or year from your account towards this fund, depending on the duration you choose.

How do I withdraw from ELSS SIP?

In case you have invested in an ELSS SIP, then each installment gets locked in for a period of 3 years. So, suppose you invest in April 2018, then you can withdraw that amount only in march 2021 and the cycle goes on and on until you do not close the fund. Hence, you would need to make partial withdrawals of amounts that were invested 3 years before the withdrawal date.

How do you stop ELSS SIP?

You just need to contact your mutual fund company and stop your investment. However, you cannot withdraw the invested amount for a period of 3 years.

How many ELSS funds should I invest in?

It does not matter how many ELSS funds you invest in as the total exempted amount is only Rs. 1.5 Lakhs. So, you can either divide this amount accordingly between mutiple ELSS funds or just choose one.

How much should I invest in ELSS?

If your purpose is to save tax, then Rs. 1.5 Lakh a year is okay to invest. However, if your purpose is for retirement planning, then you can invest as much as your financial condition allows you. There is no maximum limit to it.

How much should I invest in NPS?

It depends on your retirement planning. The money that you can safely keep aside without needing to withdraw it until retirement can be invested in this scheme.

Is ELSS returns tax-free?

No, You get a tax exemption of up to an investment made of Rs. 1.5 lakh on your returns. If you invest more than the allowed amount, then you will not get any tax benefit on the additional investment made. The returns generated are now under the purview of Long Term Capital Gains Tax (LTCG) and will be taxed accordingly.

Is ELSS safe?

ELSS is not for people who are risk-averted. It depends on the condition of the market and is subject to market risks.

Is ELSS taxable after 3 years?

Yes, from January 2018, ELSS mutual Funds have been included the tax purview of Long Term Capital Gains Tax (LTCG) and will be taxed accordingly.

Is NPS a good investment option?

NPS is a good option for people who want to save up without any hurdles and invest only towards their retirement.

Is SIP tax-free?

Only certain SIPs, such as the ones done towards ELSS funds are tax-free.

Which ELSS is best to invest in 2018?

Motilal Oswal long-term equity fund direct is one of the best choices for investment in the year 2018.

Which is better ELSS or PPF?

ELSS gives higher returns and has a shorter lock-in period as compared to a PPF.