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Equity-linked Saving Schemes (ELSS) can Save NRIs from Taxes

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Equity-linked Saving Schemes (ELSS) are tax-saving mutual funds that are specifically designed for investors who want to save taxes. ELSS funds offer the twin benefits of capital appreciation and tax savings.

The investment in ELSS funds is locked in for a period of three years, which is shorter than the lock-in period for most other tax-saving investments. This makes ELSS funds a preferred option for investors who want to save taxes and also have the flexibility to redeem their investments before the end of the lock-in period.

Advantages of Investing in ELSS for NRIs

Equity-linked Saving Schemes (ELSS) is one of the best tax-saving investments for NRIs. Here are some of the advantages of investing in ELSS:

  1. ELSS is a diversified equity mutual fund that invests in a mix of stocks and bonds. This gives you the opportunity to benefit from capital appreciation and regular income from dividends, while also getting tax benefits under Section 80C of the Income Tax Act.
  2. The lock-in period for ELSS is only 3 years, which is much shorter than the lock-in periods for other traditional tax-saving investments like PPF (15 years) and NSC (5 years).
  3. ELSS offers a higher rate of return than other tax-saving investments. For example, the average annualized return for ELSS over the last 3 years has been around 17%, compared to 7% for PPF and 10% for NSC.
  4. You can invest in ELSS through a lump sum or through a Systematic Investment Plan (SIP), which allows you to invest small amounts of money at regular intervals. This helps you to reduce the risk associated with investing in equities and also helps to spread out your investment over time.

Tax Planning Benefits for NRIs

NRIs have a few tax-saving options available to them, but Equity-linked Saving Schemes, or ELSS, is one of the best.

Here’s why:

  1. ELSS are exempt from estate duty and inheritance tax in India so that they can be passed on to heirs without any additional taxes payable.
  2. Contributions to ELSS qualify for deduction under Section 80C of the Income Tax Act, up to a maximum of Rs 1.5 lakhs per annum. This deduction is available to all taxpayers, not just NRIs.
  3. The returns from ELSS are tax-free in India. This is a major advantage over other tax-saving options like fixed deposits and National Savings Certificates (NSC), which offer taxable returns.
  4. ELSS has a shorter lock-in period than other tax-saving instruments like PPF and NSC – just 3 years compared to 15 years for PPF and 6 years for NSC. This makes them more flexible and easier to liquidate if needed.

How to Choose the Right ELSS Mutual Fund?

When choosing the right equity-linked savings scheme (ELSS) mutual fund for your NRI tax planning efforts, there are several factors to consider. 

First, look at the fund’s performance against its benchmark indexes, such as the Nifty 500 or Sensex 30. You’ll want to invest in a fund that has consistently outperformed the market. 

Next, examine the fund’s portfolio composition. Look for a fund that is well-diversified across sectors and features a good mix of large-cap, mid-cap, and small-cap stocks. 

Additionally, compare the fund’s entry load and exit load fees as well as its expense ratios to make sure you’re getting a competitive rate of return on your investment. 

Finally, research the fund manager’s track record and history of success to determine if your money is in good hands.

Risk Involved with ELSS Mutual Funds

Before investing in an ELSS mutual fund, it’s important for NRIs to understand the risks involved. While equity-linked saving schemes can be great investment options for NRIs looking to save on taxes, there is no guarantee of returns. Like any other equity-based investments, there is a risk associated with ELSS mutual funds, and the value of your investment could go up or down depending on market conditions.

Furthermore, investors should also bear in mind that the returns on ELSS mutual funds are subject to taxation. Under the Indian Income Tax Act 1961, profits earned from ELSS mutual funds within the first three years of investment are subject to a 10% long-term capital gains tax. After three years, they are taxed as per the tax slab rate applicable to the investor.

FAQs on Investing in ELSS as an NRI

There are a few key FAQs to consider when investing in ELSS as an NRI. 

  • Before investing you need to determine if you are eligible to invest in ELSS. As a Non-resident Indian or NRI, you can invest in ELSS provided your money is remitted into India through a legitimate banking channel and it is accompanied by proof of legitimate remittance. 
  • NRIs may also note that any income earned from the growth of their investments will be subject to taxation under the respective laws of their country of residence.
  • NRIs should also consider the availability of tax incentives and benefits in their country of residence when making such investments.

What are the key features of ELSS funds?

Equity-linked Savings Schemes (ELSS) are a great way for NRIs to save on taxes. The ELSS funds have a number of key features that make them an attractive option for tax-saving investments.

First, they offer a much shorter lock-in period than traditional tax saving schemes. For ELSS funds, the lock-in period is only three years compared to five years for other types of investments.

Second, ELSS funds have the potential to offer higher returns than other tax-saving instruments since they are actively managed and linked to the stock market. The returns are not guaranteed and there is no assurance that your investment will return any money at all, but in the long run, it can offer higher returns with lower costs compared to other investments.

Finally, ELSS funds come with the added benefit of being eligible for deductions from taxable income when computed as per Section 80C of the Income Tax Act. This can help NRIs minimize their tax outgo and maximize their tax savings.

Types of ELSS

ELSS is available in two types: Growth and Dividend. 

  1. In a Growth ELSS, the returns are directly linked to the market performance.
    • The investors’ money is plowed back into the fund and added to the NAV of that fund. 
    • This increases the corpus of ELSS over time and gives growth to the investor’s money.
  2. In a Dividend ELSS, the fund manager uses part of the corpus to pay dividends to investors.
  • The dividend may be tax-free in some cases, depending on individual tax brackets and laws. 
  • However, this approach also reduces your corpus gradually, so it’s not recommended for long-term investments.

In conclusion, Equity-linked Saving Schemes (ELSS) are an excellent option for NRIs looking to save on taxes. By investing in a tax-saving scheme, NRIs can get the dual benefits of capital appreciation and tax relief at the same time. ELSS investments not only help NRIs lower their tax liability and save money, but also provide them with a steady stream of income over the long term. Moreover, investing in ELSS is easier than ever due to the availability of online platforms that enable quick and secure transactions. So, if you’re an NRI looking to save on taxes, consider investing in an ELSS today.