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Home / Saving Schemes

Equity-Linked Saving Schemes

After the financial year ending 1992, Equity-Linked Saving Schemes (ELSS) were covered under Section 88, enriching the tax provisions pertaining to long-term capital gains. The structure of the ELSS is one of the most effective instruments for slashing taxes.

By law, ELSS is required to have at least 80 percent of its funding amount invested in equities. But thanks to a bearish trend in the market, many of the investors in the equity markets lost their shirts and a whole lot more. The effect on all equity-based schemes like UTI and Mutual Funds, including ELSS was disastrous since the retail investor lost all confidence in equity funds in general and Mutual Funds in particular.

Lately however, the retail investor is slowly returning to the market since it has started looking up thanks to the proliferation of IT-based stocks. This is perhaps the best time for taxpayers to invest in ELSS since the dividend from equity based schemes by UTI / MFs is tax-free now.

Earlier, ELSS used to be a close-ended product, with a term lasting for 10 years. Nevertheless ELSS is a better product and even investors outside the taxation net should consider ELSS seriously now. After all, mutual fund schemes are launched at the end of the fiscal year. And investors are not able to invest their funds as and when they are available. There is no need for them to let their resources idle for a long period.

Since the fund manager's portfolio is constructed only after the closure of the scheme, there is no way that the investor can know about the fund's track record or the portfolio, either. Besides, when the mutual fund is forced to unload its holdings at the end of 10 years, the consumer is also forced to accept the funds, regardless of the fact that they are needed or not.

ELSS, being open-ended has added immense value to its structure, which was already better than all its competitors:

• Contributions to ELSS are eligible for rebate under Section 88 with a sub-ceiling of Rs.10,000/- within the total of Rs.60,000/- The contribution of Rs.10,000/- earns a rebate of Rs.2,000/- resulting in an actual investment of Rs.8,000/- Even if direct income by way of dividend or growth is nil, the investment of Rs.8,000/- will nevertheless grow to Rs.10,000/- in 3 years.
  
  
• No other scheme under Section 88 has a lock-in period as low as 3 years and this constitutes an additional advantage. After all, the fund manager has a wider field to play on. He does not have to keep extensive funds liquid to meet repurchase obligations as he might have to do in a pure equity based open-ended scheme. Also, over 80 percent of the funds has to be invested in equities or related schemes.
  
  
• ELSS' performance usually emulates the market conditions. Investors who have an appetite for a bit of risk definitely pour their funds into these schemes. After all, in the long run equities beat all other avenues of revenue.
  
  
• In case of the demise of the investor, his nominee or beneficiary is allowed to withdraw only after the completion of one year from the date of allotment. No long term capital gains tax is applicable for the beneficiary or the estate of the deceased.

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