Equity Linked Saving Scheme (ELSS) is a mutual fund scheme in which the investor’s money is invested into equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies. It is generally suited to those investors, who look forward to investing for long terms and who are comfortable with market risks as due to high volatility, investment is risky in such funds. Investment returns in such funds are generally high since equities perform well in the long run. The investment portfolio is managed by experienced and professional investors therefore, there is high security in such funds.
Investment are also made in partly convertible issues of debentures and bonds including those issued on rights basis subject to the condition that, as far as possible, the non-convertible portion of the debentures so acquired or subscribed, shall be disinvested within a period of twelve months. It is the only mutual fund scheme which is exempted from tax under Section 80(c) of the Income Tax Act and exemption upto Rs. 1,50,000 can be claimed. ELSS has the lowest lock in period of 3 years as compare to other tax saving avenues.
ELSS is regulated by the Equity Linked Saving Scheme, 2005. According to Rule 2, an individual or a Hindu undivided family or an association of persons or a body of individuals consisting, in either case, only of husband and wife governed by the system of community of property in force in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu by whom, or on whose behalf, investment is made can invest in the scheme.
Rule 3 of the ELSS Scheme provides for minimum cap of Rs. 500 for investment into the scheme. A plan is made open for investment for a period of three months and a minimum of 3 years investment is required under the scheme. After the said period of three years, the assessee shall has the option to tender the units to the Unit Trust or the Mutual Fund, for repurchase. In the event of the death of the assessee, the nominee or legal heir, as the case may be, is able to withdraw the investment only after the completion of one year from the date of allotment of the units to the assessee or any time thereafter. After the expiry of 3 years from the date of issue, the units issued under the plan can be transferred, assigned or pledged
Under Rule 5 (b) of the scheme, it is mandatory that eighty percent of the money has to be invested in equities. After three years of the date of allotment of the units, the Unit Trust or Mutual Fund may hold up to twenty per cent of net assets of the plan in short-term money market instruments and other liquid instruments to enable them to redeem investment of those unit holders who would seek to tender the units for repurchase.[1] Repurchase of units is at the repurchase price prevailing on the date the units are tendered for repurchase.[2]
After a period of three years from the date of allotment of units, when the repurchase of units is to commence, the Trust and the Mutual Fund announce a repurchase price every month or as frequently as may be decided by them. In calculating the repurchase price, the Unit Trust and the Mutual Fund take into account the unrealised appreciation in the value of the investment of the funds of a plan to the extent they deem fit provided that it shall not be less than fifty per cent of such unrealised appreciation. While calculating the repurchase price, the Unit Trust and Mutual Funds also deduct such sums as are appropriate to meet management, selling and other expenses including realisation of assets and such sums shall not exceed five per cent per annum of the average Net Asset Value of a plan.
National Pension Scheme (NPS), a pension cum investment scheme, was launched by the government in 2004 for central and state government employees with the objective of providing security after retirement. Unlike provident fund and superannuation, where the rate of return is fixed, under NPS there is a possibility of higher growth. However, the individual also needs to exercise caution when selecting funds and continuously monitor the movement of stocks to avoid losses. A minimum of Rs. 500 can be invested by the subscriber of the scheme.
This scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). All types of employees private or government can invest in pension account and after retirement the said amount is received in the form of a pension. Currently, on retirement or on reaching the age of 60, NPS subscribers are allowed to withdraw 60% (Tax free) of the corpus while 40% has to be invested in annuity plans for getting regular pension. A person cannot withdraw before the term of maturity however, in case of purposes like critical illness, etc. 25% of the fund can be withdrawn. In the event of death of the person, full corpus can be withdrawn by the nominee. In case the fund is withdrawn before the period of retirement, then 20% of the corpus is withdrawn tax free and rest 80% has to be purchasing annuity. Amount invested in purchase of annuity is tax free but the pension income i.e. the annuity income is subjected to tax.
There are two types of account i.e. tier 1 and tier 2. Tier 1 account is the most basic and the NPS invests funds of government employees in corporate and government bons. Non-government employees funds are invested in mix of stocks, liquid funds, fixed deposits, and corporate and government bonds.
Tier 2 account is voluntary and in addition to the tier 1 account and in this type of account subscribers can invest and withdraw at any time they want to and it does not attract taxes from employees whether private or government. NPS Tier 2 Account is not eligible for any taxation benefits, except for a central government employee and have claimed deduction under Section 80C for contribution made towards Tier 2 account in which case the money so deposited will have a lock in of a period of three years.
There are two types of investment choice under the scheme open to a subscriber:
Auto Choice: In this type of investment choice, the subscriber is automatically allotted a fund amongst three funds i.e. Equity (E), Corporate Bonds (C) and Government Bonds (G) in a pre-defined portfolio pattern prescribed by PFRDA. Maximum Equity allocation to E type is 75%, Corporate Bonds is 50% and Government Bonds is 25%.
Active Choice: In this type, the subscriber chooses among the three types namely E, C and G. Maximus allocation to equity is 75% and to Corporate and Government Bonds is 100%. The subscribers can also change their investment choice and asse allocation ratio twice a year.
However, the equity exposure gradually decreases as the age of the person increases.
National Pension Scheme (NPS) being one of the pension scheme referred to in section 80CCD of the Act, is included in the definition of salary in view of provisions of section 17(1)(viii) of the Act and is assessed as such in the hands of employee-assessee.
Section 80 CCD(2) of the Act provides deduction for employer’s contribution to NPS to the extent of 10% of the salary (14% for government employees). An employee can claim deduction up to 1.5 lakhs under Section 80C of the Income Tax Act and an additional 50,000 per annum under Section 80CCD (1B).
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