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Do market-linked investment instruments also have tax benefits?

There are 3 market-linked investments with tax benefits in India currently.

Unit Linked Insurance Plan (ULIP):
It is a unique financial instrument that allows market-linked investments with tax benefits and also provides insurance

  • ULIPs come with lock-in period of 5 years and allow investors fund options with different asset allocations between equity and debt to choose from
  • This tax saving equity investment enables you to save tax upto ₹1.5 lakh as per Section 80C paid towards the premium of a ULIP in a financial year
  • The fund value of the policy on exit( either after 5 years or longer) from the ULIP is also tax free in the hands of the investor
  • One can also freely switch between various fund options available without any tax implications
  • They are among the only market linked instruments outside the ambit of the Long Term Capital Gains tax

Equity Linked Savings Schemes(ELSS):
ELSS are  close-ended mutual funds with a 3 year lock in period that invest in equity shares of companies across sectors and market capitalisations

  • They are a tax saving equity investment under Section 80C of the Income Tax Act. They are eligible for a deduction of upto ₹1.5 lakhs.
  • Gains above ₹1 lakh made on transfer of ELSS funds with 65% or more exposure to equity are subject to 10% percent long term capital gain tax(LTCG) from April 1, 2018. Gains made till January 2018 are exempted from tax
  • Since dividends declared in ELSS qualify for a dividend distribution tax of 10%, growth option is better for investment purposes

National Pension Scheme (NPS): NPS is a pension scheme by the government that ensures retirement benefits with regular contributions during your working life. It is also a tax-saving equity investment

  • An individual can either  invest money in different asset classes (active choice) or opt for a default option which invests money as per their age (auto choice)
  • Active choice allows you to invest upto a maximum of 75% in Asset class E, which invests in equities. The auto choice also offers three life cycle options with 25%, 50% and 75% equity exposure
  • One can claim an additional deduction of ₹50,000 as per section 80CCD1(b) of the Income tax for their contribution to NPS making it one of the few market-linked investments with tax benefits
  • Section 80CCD(1) allows an employee to claim a contribution made by him upto 10 percent of his salary(basic plus DA). This is within the ₹1.5 lakh deduction limit under 80C and 80CCE
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