Source: The Economic Times.
The emergence of ELSS has changed the nature of recovery of funds. ET explores the options available for investors.
Investments under Section 80C result in tax savings. However, the money that is invested under various routes is locked in for a certain time period, usually three years. The emergence of equity-linked savings schemes (ELSS) has changed the nature of recovery of funds. ELSS are mutual fund schemes that are diversified in nature and invest their money in equity instruments. Investments in ELSS are eligible for tax benefits. ELSS offers various options to investors like dividend payout, dividend reinvestment and growth. Financial advisors have different views on which option to select but most investors opt for dividend payout these days. Let us consider the impact of the various routes.
In addition to this, the investor gets a large part of the money recovered from the fund due to the tax-savings. For example, consider an investment of Rs 50,000 in ELSS, where Rs 20,000 comes back to the investor as dividend and there is a tax-saving of Rs 15,000. In effect, Rs 35,000 is accounted for at this stage itself. This may seem like a win-win situation for investors because they get a large part of their money back from the fund. This money can then be reinvested in some other area, but this does not generate extra returns, since investors just get back their own money. The key factor that investors should consider when they invest in ELSS is whether the performance of the scheme over the next several years will be good enough to generate decent returns.
The emergence of ELSS has changed the nature of recovery of funds. ET explores the options available for investors.
Investments under Section 80C result in tax savings. However, the money that is invested under various routes is locked in for a certain time period, usually three years. The emergence of equity-linked savings schemes (ELSS) has changed the nature of recovery of funds. ELSS are mutual fund schemes that are diversified in nature and invest their money in equity instruments. Investments in ELSS are eligible for tax benefits. ELSS offers various options to investors like dividend payout, dividend reinvestment and growth. Financial advisors have different views on which option to select but most investors opt for dividend payout these days. Let us consider the impact of the various routes.
- Under the growth option, the gain of the scheme is added to the net asset value (NAV) and no amount is paid to the investor. Investors can withdraw the money after the minimum lock-in period of three years. The difference between the cost price and sale price constitutes the capital gains; since the sale is after a period of three years, these will be long-term capital gains. Under the current income tax provisions, no tax needs to be paid for such gains. If there is a loss, such a loss will not be allowed as a set-off against other capital gains.
- Under the dividend reinvestment option, the scheme declares a specific amount of dividend. This amount is not paid out to the investor but it is converted into more units after the dividend is adjusted and hence, it has the feature of reinvestment. The dividend received is tax free in the hands of the investor.
- Under the dividend payout option, the dividend declared is paid out to the investor, which is tax free. However, the receipt of dividend affects the way in which the investor manages his/her funds.
In addition to this, the investor gets a large part of the money recovered from the fund due to the tax-savings. For example, consider an investment of Rs 50,000 in ELSS, where Rs 20,000 comes back to the investor as dividend and there is a tax-saving of Rs 15,000. In effect, Rs 35,000 is accounted for at this stage itself. This may seem like a win-win situation for investors because they get a large part of their money back from the fund. This money can then be reinvested in some other area, but this does not generate extra returns, since investors just get back their own money. The key factor that investors should consider when they invest in ELSS is whether the performance of the scheme over the next several years will be good enough to generate decent returns.
Post a Comment