Why save only 45000 when you invest in ELSS, Save 51000 instead!
Investors are always interested in finding out about the top ELSS funds to invest in. However, one low-hanging fruit is to invest in direct plans of ELSS funds which can give a guaranteed increase in returns.
How you can save taxes with ELSS funds
First a quick recap of how you can save up to Rs 45,000 by investing in ELSS and other 80C eligible instruments. Section 80C of the Income-tax act allows you to claim a deduction of up to 1.5 lakh in your taxable income if you invest in eligible instruments. For those in the highest tax bracket of 30%, this works out to be saving of 45,000 in your tax bill. Here is the calculation:
Even for those in the lower tax brackets of 10% and 20%, savings turns out to be 15000 and 30000 respectively.
However, did you know that if you are investing in ELSS funds, you do not need to be satisfied with just a saving of 45000, you can save 6000 more to take your total savings to 51000! Repeating the above calculation in reverse, an additional saving of 6000 is equivalent to having a 80C limit of 1.7 lakhs for somebody in the 30% tax bracket.
Save more by investing in direct plans of ELSS funds
So how to save an additional 6000 Rs? Simple. Buy only direct plans of ELSS funds. Every mutual fund has two plans: regular and direct. These plans are same in every respect but in regular plans, you have to pay commissions every year while direct plans are 0-commission. Since ELSS funds have a lock-in of 3 years, if you choose to buy a regular ELSS fund today you will be paying commissions for 3 years.
Orowealth looked at the performance of all 33 ELSS funds which existed 3 years back on 1st December 2013. Our calculations show that if you had invested your entire 80C limit of Rs 1.5 lakhs in direct plan instead of the regular plan, on an average you would have saved a total of Rs 6000 in commissions.
Also if you look at the ELSS fund industry, then nearly 85% of the money is managed by just 10 funds (as of Oct 2016). In the table below we show the commissions that you could have saved in each of these funds by going direct. The largest ELSS fund is the Axis Long Term Equity Fund which alone has 23% of the total ELSS money (as of Oct 2016). Investors in Axis could have saved 11000 in commissions by just choosing the direct plan.