Taxes, investments and profits are probably the last things on your mind when you embark on your professional career. As a young millennial at your first job, you want to excel at work and have fun beyond it. But tax planning and investing for your future is essential too, and here’s how you can do it through Equity Linked Saving Schemes (ELSS).
First, lets’ take a look at different traditional tax saving investments:
- Tax-saving FDs
Tax saving Fixed deposits (unlike regular FDs) offer tax breaks to investors. However, they also come with a lock-in period of 5 years. So be careful not to break the fund before the tenure is completed. The interest rate on these deposits can vary between different banks. In general, you will find that rates range anywhere between 6.5-7.5%.
You can claim a deduction for investments up to Rs. 1.5 lakh in a financial year in tax-saving fixed deposits (FDs). Tax-saving FDs offer complete capital protection, and you can be assured of guaranteed. But you may also want to take note that the interest you earn is added to taxable income upon maturity of the deposit.
PPF is a popular investment avenue in India. When you invest in PPF, you can avail a tax deduction of Rs. 1.5 lakh under Section 80C of the Income Tax Act. The main aim of this scheme is to encourage people to increase their savings. Hence, to further the popularity of PF, you can begin with a minimum deposit of Rs. 500 every year. With an interest rate of 8% compounded annually, the returns on PPF are slightly better than other investment avenues. However, PPF comes with a lock-in period of 15 years.
- The Rajiv Gandhi Equity Saving Scheme (RGESS)
This scheme is exclusively for first-time retail investors in the securities market. Under this scheme, you can avail tax benefits under Section 80CCG of the Income Tax Act. The plan allows a maximum investment of Rs. 50,000 and comes with a 50% deduction of the amount invested during the year. And while this was a great scheme for new investors, it is being phased out due to a limited number of assesses who avail this deduction.
This brings us to ELSS.
Equity Linked Saving Scheme is a category of mutual funds that offer investors the dual benefits of tax saving and income growth. These open-ended mutual funds invest primarily in the stock market. They have a lock-in period of just three years. Therefore, if you are starting out your professional career, this is perhaps the best place to begin investing.
When you invest in ELSS funds, you can claim up to Rs. 1.5 lakh every year as a deduction from your total gross income under Section 80C of the Income Tax Act. Also, the dividends you earn through ELSS funds are tax-free. Investing in ELSS can help you decrease your tax liability substantially every year.
Many tax-saving investment options are available, but when it comes to excellent yields, ELSS is probably the best option for millennials. This is because they offer much higher returns compared to other tax saving avenues. For instance, PPF offers around 7-8% returns to investors while tax-saving FDs offer approximately 6.5-7.5%. On the other hand, ELSS funds offer returns anywhere between 10-15%. And if you invest carefully, you could earn higher profits. This is because the returns on ELSS are directly linked to the equity market. So, a good run in the stock market could reflect in high profits.
Some investors hesitate to invest in ELSS funds because of risk exposure. It is true that ELSS returns are linked to the performance of equity markets. Therefore, a poor performance in the market could result in lower returns. However, the fear of volatility is warranted only if you are interested in short-term returns. But when you invest for the long term, your risks not only come down, your profits increase in a big way. So, as a millennial starting your professional career, you have substantial time to maximise your earnings.
Imagine you are 25 years old and have just started working at your first corporate job. You invest Rs. 5,000 in an ELSS fund each month. The fund offers a return of 15% per annum. By the end of 10 years, you would have earned a sum of Rs. 14 lakh. If you continue the same investment for another 10 years, your earnings will go up to Rs. 76 lakh by the time you are 45. This is the power of compounding.
Now, let’s assume you started investing a decade late at 35 years instead of investing Rs. 5,000, you double the amount to Rs. 10,000. However, at the end of 10 years, the amount you earn is Rs. 28 lakh. These are good returns but not as high as what you would have gained if you started investing at 25.
ELSS is an excellent investment avenue for young professionals who are new to investing. You not only get tax deductions each year, but you can also create a large corpus to meet your financial needs whether it is to buy a new car, go on a vacation or plan your retirement. And the best part is you can start small as long as you have a long-term investment strategy.