| Equity Linked Saving Schemes (ELSS) or tax | | | | involve a certain lock in. In this case the lock in is |
| saving mutual fund schemes as they are | | | | for three years. Hence an ELSS investment |
| otherwise known as, are a popular tax saving | | | | cannot be withdrawn for a period of three years |
| investment. The major reason for this popularity | | | | from the date of investment. This lock-in is like a |
| has been the introduction of Section 80C of the | | | | double-edged sword. On the one hand, it fosters |
| Income Tax Act, from April 1, 2005. This section | | | | long-term investment, which is very essential |
| allows the investor to invest up to Rs 1 lakh in | | | | while investing in equity. And on the other, if you |
| various investment products and get a tax | | | | find yourself in a situation where you require |
| deduction for the same. The list of investment | | | | funds in an emergency, you will have to resort to |
| products also includes ELSS. Earlier, till March 31, | | | | other means / investments --- the ELSS fund will |
| 2005, investment in these tax saving schemes | | | | be closed to you for three years. Withdrawals are |
| only allowed for a tax deduction of up to Rs | | | | just not allowed, not even with a penalty. |
| 10,000 under Section 88. | | | | 3. Tax saving schemes carry the risk of investing |
| However, that being said, there are various things | | | | in equity: ELSS funds are promoted as good |
| an investor needs to keep in mind before deciding | | | | investments as they enable the fund manager to |
| to jump into an ELSS investment. | | | | take long-term calls on account of the enforced |
| | | | three year lock-in. In other words, the fund |
| 1. Section 80 C spoils you for choice: As has been | | | | manager doesn't have to worry about keeping |
| mentioned above, ELSS is not the only | | | | funds liquid to cater to daily redemptions that can |
| investment avenue that comes under Section | | | | happen in normal open ended schemes. However, |
| 80C. Other investments such as Life Insurance, | | | | it has to be kept in mind that ELSS funds for all |
| Public Provident Fund (PPF), National Savings | | | | practical purposes are similar to normal diversified |
| Certificates (NSCs), Senior Citizen Savings | | | | equity mutual fund schemes. The funds in these |
| Scheme (SCSS), Post Office Monthly Income | | | | schemes are invested in the stock market. Hence |
| Scheme (POMIS) etc also offer a similar tax | | | | the returns these schemes generate depend on |
| benefit. Then there are mandatory payments | | | | the kind of stocks the fund manager invests in |
| such as your PF, tuition fees of children and even | | | | and the overall state of the market. So if an |
| housing loan repayments that are covered under | | | | investor invests in a tax saving scheme, and |
| Sec. 80C. Let us say an individual contributes Rs | | | | three years down the line, when the lock-in ends |
| 40,000 to the PPF every year and Rs 30,000 is | | | | and the markets are not doing well, his total |
| his provident fund deduction. So for him it makes | | | | returns will take a beating. Yes, this has not |
| sense to invest only the remaining Rs 30,000 [Rs | | | | happened in the past as the Indian market is in a |
| 1 lakh - (Rs 40,000 + Rs 30,000) = Rs 30,000] | | | | lateral bull phase (barring the occasional hiccups). |
| for tax deduction under Sec. 80C. This is primarily | | | | However, the potential of capital loss is very |
| because if he invests more than Rs 30,000, he will | | | | much there and it has to be considered. So |
| cross the overall level of Rs 1 lakh and the | | | | investors need to consider their risk taking ability |
| deduction is limited to Rs 1 lakh. | | | | in terms of age and responsibility before deciding |
| 2. Lock-in of three years: Like all investment | | | | on investing in ELSS. |
| avenues under Section 80C, ELSS funds also | | | | The bottom line? |