Millennials are a very important demographic segment in India, constituting nearly half of our workforce. Growing up in post liberalization lifestyle and spending habits of millennials are different compared to previous generations. The data from Registrars and Transfer agents (RTAs) show that around 47% of new mutual fund investors in FY 2018 -19 were millennials. One of the important financial goals for millennials is tax saving and Mutual Fund Equity Linked Savings Schemes (ELSS) can be one of the best tax saving investment options for millennials.
Most millennials are in the early stages of their careers., millennials can save up to Rs 46,800* in taxes every year by investing up to Rs 1.50 lakhs in specified schemes under Section 80C of the Income Tax Act 1961. This is a significant amount of savings in the early stage of the investor’s career and over the years may add up to substantial sum. The money invested in 80C schemes also generates potential return on investments and over a long period of time may grow to a substantial corpus through the Power of Compounding. *Assuming investor falls in the 30% Income Tax bracket.
Millennials are in the 23 to 38 age group. Most of them have 25 – 35 years of working lives ahead of them and their financial liabilities are likely to be low. As such, they have high risk capacities and equity is one of the ideal asset class for them. Financial planners usually suggest that millennials should have 60 – 75% of their assets allocated to equity. Though equity is volatile in the short term, it has the potential to generate superior returns in the long term. For example – Since inception (1979) S&P BSE Sensex TRI Index has, generated 15.3% annualized returns outperforming all other asset classes.
**Source: Bloomberg as on 21st November 2019.
ELSS is essentially an equity mutual fund schemes which qualify for tax savings under Section 80C. They have a lock-in period of 3 years. ELSS invests in stocks across market capitalization segments and industry sectors, diversifying stock specific and sector specific risks.
In the last 10 years (period ending 21st November 2019), ELSS as a category delivered on average more than 11.5% CAGR returns** (top performing schemes delivered much higher returns than the category average). ELSS has the highest wealth creation potential among all the 80C investments. **Source: ACE, MF as on 21st November 2019, based on simple average of 20 ELSS Funds which have completed more than 10 years performance track record
Individuals and HUFs can claim deduction under Section 80C of Income Tax Act up to an overall limit of Rs.1.5 lakhs from taxable income by investing in ELSS mutual funds. Long Term Capital gains in excess of Rs 1 lakh from sale of ELSS units are taxed at 10%. Dividends paid by ELSS are tax free in the hands of the investor but Mutual Funds have to pay 10% Dividend Distribution Tax before paying dividends to investors.
ELSS is a flexible investment under Section 80C. These two are important factors for millennials. Unlike life insurance plans (both traditional and unit linked), there are no charges for pre-mature withdrawal or surrender in ELSS; you can stop investing at any point of time (though not recommended) without penalty.Summary
Tax savings may be considered as one of the most important annual financial goals of millennials. ELSS Mutual Funds may help millennials not just with tax savings but with substantial wealth creation over a long investment horizon through disciplined investing. You should consult with your financial advisor about tax savings with ELSS and may consider the capacity of this segment for your long term investing.
Source: Advisorkhoj, Mutual Fund Research as on 31st November 2019.
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