ELSS vs Other 80C Investments - Why ELSS is the Best Tax Saving Option?

Investing in ELSS funds are an efficient way to save taxes when compared to the other investment instruments available under Section 80C of the Income Tax Act, 1961. ELSS comes with the advantage of a shorter lock-in period and professional fund management, which can lead to wealth accumulation. We have covered the following in this article: Learn more about the other aspects of ELSS funds in this article.

Understanding Equity Linked Saving Schemes

ELSS mutual funds are managed by experienced finance professionals called fund mangers and are offered by almost all the fund houses in India. ELSS mutual funds are the only class of mutual funds eligible for tax deductions. You can save up to Rs 46,800 (tax deductions of up to Rs 1,50,000) a year in taxes by investing in ELSS, which is covered under Section 80C of the Income Tax Act, 1961. However, you can invest more than this designated amount, but the excess over Rs 1.5 lakh will not qualify you to avail the tax benefits as per the provisions of Section 80C. The returns generated from ELSS are taxable on Capital Gains (LTCG). Tax on long-term capital gains (LTCG) was reintroduced in the Union Budget 2018-19. Despite the change, ELSS has continued to dominate as the most preferred option among all Section 80C investment options.

Types of ELSS

ELSS funds are broadly classified into dividend funds and growth funds.

• Growth Fund is long-term wealth creation platform for investors where the full value of the fund is realised at the time of redemption.
• Dividend Payout has two sub-categories – Dividend Payout and Dividend Reinvestment. Under the Dividend Payout option, you will receive tax-free dividends. In the case of Dividend Reinvestment, your dividends will be reinvested as a new investment.

Why ELSS is better than all other 80C Investments

Despite the new tax regime, i.e. tax on Long-Term Capital Gains from ELSS, these funds, in the opinion of experts, still, hold their place as one of the best tax-saving options. ELSS can play a significant role in your portfolio. These equity-linked instruments have the potential to offer higher returns and are an ideal choice of investment for the long term. ELSS holds its ground, even with its returns being taxed, with higher post-tax returns than any other Section 80C investment options such as Public Provident Funds (PPFs) and ULIPS.

Higher Returns on Investment (ROI)

Given that ELSS invests predominantly in the equity instruments, the returns are much higher than most investment options with tax-saving benefits in the longer run. This serves two purposes; you not only save on taxes but also generate high returns/profits. ELSS can be the right choice for an individual who is willing to invest for a medium to long duration. Historical performance shows that ELSS generates about 12% over ten years and more. This, when compared to a mere 8% returns offered by PPF, is a significant gain.

Shorter Lock-in Investment Tenure

ELSS has a lower lock-in period. Unlike the PPF, NSC and EPF, all of which requires a minimum of five years lock-in period, ELSS is a far better option with just three years of lock-in.

Flexibility with ELSS

It is possible that your ULIPs, which were sold to you at a low cost through insurance firms directly, generate returns similar to that of an ELSS in the longer run. However, what a ULIP doesn’t offer is the flexibility of ELSS. If you are unhappy with your ELSS fund, then you may move to another fund as you are not required to commit to a multi-year deal. In the case of a ULIP, if you are unhappy with the fund, you can only shift and invest in funds that are offered by that ULIP.

The advantages of Combining ELSS and PPF

Another clear advantage that ELSS enjoys over its counterparts is that it can be coupled with PPF for more significant benefits. This combination is a solid ground to uncover the stability offered by PPF and the earning potential of ELSS. If you see closely, you find out that there are further advantages to this arrangement; your portfolio is well diversified with a mix of debt and equity, you have the safety of government-backed securities with an opportunity to grow through equities.

Protection in times of volatility

ELSS mutual funds are often the first point of engagement for investors when it comes to investing in equity-linked investments. Many equity investors start off their investments in equity-linked investment with these funds and then go on to investing in equity mutual fund schemes. It helps to build discipline, given that you can’t touch the fund for the lock-in period of three years. These funds also act as a strong shield to weather the volatility that may come with investing in stock markets. The scheme not only benefits from the market highs but also has provisions to lessen the impact of the lows.

Things to know about ELSS before you invest

• You may invest any amount you like in an Equity-Linked Savings Scheme. However, investments only up to Rs 1,50,000 a year are tax-exempt under Section 80C of Income Tax Act, 1961.
• It is one of the best investment options that offer tax benefits with potentially higher returns and short lock-in period (3 years).
• The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, and dividend received is tax-free in the hands of investors.
• You can continue to invest in this scheme even after the completion of the lock-in period of three years.
• The risk involved with ELSS is higher when compared to a fixed deposit or PPF, but the returns have the potential to be more elevated.

It is essential to consider all aspects of the funds as well as your investment objective before you make any investment. Consult an expert or visit ClearTax to invest in the top funds that are handpicked by experts. There is something for every risk profile, and you can choose what best meets your financial requirements.  

LTCG Tax on ELSS

LTCG Tax on ELSS
LTCG Tax on ELSS up to Rs 1 lakh	NIL
LTCG Tax on ELSS above Rs 1 lakh	10%

Frequently Asked Questions

As a tax-paying citizen of India, you are entitled to claim a tax rebate of up to Rs 1,50,000 a year on making the right use of Section 80C provisions. This helps you save up to Rs 46,800 a year in taxes.

What is ELSS?

An equity-linked savings scheme or ELSS is a tax-saving investment under Section 80C of the Income Tax Act, 1961. By investing in ELSS, you can claim a tax rebate of up to Rs 1,50,000 a year and save up to Rs 46,800 a year in taxes. An ELSS is the only kind of mutual fund eligible for tax benefits under Section 80C. The portfolio of these funds is dominated by equity-linked instruments such as shares.

What is ELSS funds?

ELSS Funds are a class of mutual funds that are eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. These mutual funds are equity-oriented and invest up to 65% of their portfolio in instruments such as shares. Investing in ELSS funds is an excellent way of planning your future while saving on taxes. An ELSS fund gives you the dual benefit of tax deductions and wealth creation over time.

How to invest in ELSS?

In order to invest in an ELSS, you have first to undergo KYC verification. It requires your photo in the prescribed, PAN and a valid proof of address. You can complete your KYC verification with any of the authorised KRAs. Once you have verified your KYC, you can invest in ELSS with ClearTax by following the simple steps mentioned below:

• Log onto the following page
• Select ‘tax saving’ under category
• Choose the fund of your choice
• Click on ‘invest now’ and follow the simple steps displayed

How to buy ELSS online?

The advent of technology has made investing in mutual funds a seamless process. You can purchase ELSS units in just a few clicks at the comfort of your home. All you need to is follow the simple steps mentioned below after you have completed your KYC verification:

• Log onto the following page
• Filter the fund plans by selecting ‘tax-saving’
• Select the fund of you would like to invest in
• Click on ‘invest now’ and follow the simple steps to complete the transaction

ELSS under which section?

ELSS mutual funds provide tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. They are the only kind of mutual funds eligible for a tax rebate.

How to invest in ELSS through SIP?

To invest in an ELSS, you first need to have an investment account with the fund house. You also need to complete your KYC verification before you could get started with your investment. Once these things are in place, you can initiate a purchase transaction by logging in to your investment account held with the fund house. You have to choose ‘SIP’ as the mode of investment and enter the requested details such as the frequency of SIP, the ticket size of SIP, and tenure of SIP. To make the investment process seamless, you may consider activating ECS on your bank account. Alternatively, you can also give your banker standing instructions to deposit a fixed sum into the fund scheme of your choice at predefined dates on your behalf.

What is ELSS SIP?

An equity-linked savings scheme or ELSS is a mutual fund class that offers tax rebate under Section 80C of the Income Tax Act, 1961. You can claim tax deductions of up to Rs 1.5 lakh a year by investing in ELSS. ELSS mutual funds have the potential to offer the highest returns among all Section 80C investments.

A systematic investment plan or SIP is the most popular method of investing in mutual funds. Through an SIP, you stagger your investment over time as you invest a small sum at regular intervals. Your SIP frequency can be weekly, monthly, quarterly or bi-annually, as per your comfort.

How to open ELSS account?

To invest in an ELSS, you need to open an investment account with the fund house of your choice. Opening an investment account is free of cost. Thereafter, you have to undergo KYC verification, for which you need to provide a photo in the prescribed format, PAN and valid proof of address. Once that is done, you can select the tax-saving or ELSS mutual fund under the fund house and purchase its units.

Which ELSS is best?

To understand if an ELSS is performing well, you need to look at its parameters such as past returns, expense ratio and financial ratios. You may start with analysing the fund’s performance over the last five years. A good fund shows stable performance and offers consistent returns. Look how well the fund performed when the markets were subdued.

A top-performing fund is not impacted much by the market turbulence. The returns generated by the fund must be backed its expense ratio. A higher expense ratio indicates that there are frequent changes in the fund’s constitution, which is not a good indication. Apart from these, you have to look at ratios such as Alpha, Beta and Sharpe ratio.

How much to invest in ELSS?

There is no capping on the investible amount with ELSS. However, the tax benefits are capped at Rs 1,50,000 a year. You may first consider making full utilisation your Section 80C limit by investing Rs 1.5 lakh a year. Once the limit is exhausted, if you are willing to let your investment locked-in for three years, you can invest more than this limit. If not, there are open-ended mutual funds that you may consider investing in.

How to redeem ELSS before 3 years?

All ELSS mutual funds come with a mandatory lock-in period of three years. You cannot withdraw your ELSS investment within the three years from the date of investment. There are no provisions of paying the penalty and redeeming your units within this period.

What is the difference between ELSS and mutual fund?

You cannot compare an ELSS with a mutual fund. An ELSS is also a mutual fund that offers tax deductions of up to Rs 1,50,000 a year under Section 80C of the Income Tax Act, 1961. The only difference between an ELSS and other mutual funds is that the later doesn’t offer tax benefits.

How to get ELSS statement?

In order to view your mutual fund statement, you need to log in to your investment account held with the fund house using your credentials. Once you have logged in, you have to find the ‘view/download statement’ option. Select the timeframe for which you need to view the statement and download the same. If you had invested in an ELSS via a third party, then you can access your statement on their website as well. Alternatively, you can view or download your statement on the website of RTAs as well.

How ELSS saves tax?

ELSS mutual funds are the only class of mutual funds that are covered under Section 80C of the Income Tax Act, 1961. By investing in an ELSS, you are entitled to claim a tax rebate of up to Rs 1,50,000 a year. This helps you save up to Rs 46,800 a year in taxes.

How many ELSS funds should I invest in?

It depends on the market knowledge you have. There is no ideal number, but it is advisable to keep it under 3 as it may turn out to be quite a task to track and manage your investments in multiple funds. If you are looking to invest in multiple ELSS funds for better diversification, you may consider investing in our tax-saver plan. It is a basket of top-performing funds handpicked by our in-house experts.

How to calculate ELSS returns?

If you are to estimate the return on your ELSS investment over time, then you have to follow the simple steps mentioned below:

• Log on to our ELSS calculator
• Enter the nature of investment (SIP or lump sum)
• Enter the amount of investment
• Enter the frequency of SIP (if you choose SIP as the nature of investment)
• Enter the expected annual rate of returns
• Finally, enter the duration of the investment

Our ELSS calculator displays the amount your ELSS investment would have accumulated at the end of your investment tenure on entering the details above.

How to redeem ELSS after 3 years?

You have two ways of redeeming your investments made in mutual funds. One, opting for a one-time lump sum withdrawal. Two, initiate a systematic withdrawal plan or SWP. It is a process of withdrawing a fixed sum at regular intervals.

NPS or ELSS which is better?

National Pension System (NPS) and Equity-Linked Savings Scheme (ELSS) are two of the most popular tax-saving investment options under Section 80C of the Income Tax Act, 1961. ELSS is the better of the two as it has the potential to provide higher returns and come with a lock-in period of just three years. On the other hand, NPS investments are locked-in until your retirement.

PPF or ELSS which is better?

Public Provident Fund (PPF) and Equity-Linked Savings Scheme (ELSS) are a popular tax-saving investment under Section 80C of the Income Tax Act, 1961. Between the two, ELSS is better as it has the potential to offer returns in the range of 12%-15%. On the other hand, the returns offered by PPF is restricted and can never match that of ELSS. Also, PPF comes with an extended lock-in period of fifteen years, whereas ELSS investments are locked-in only for three years.

Which is better ELSS or SIP?

ELSS is one of the most popular tax-saving investments under Section 80C of Income Tax Act, 1961. An ELSS is an equity-oriented fund that invests at least 65% of its portfolio in shares. On the other hand, SIP or a systematic investment plan is the best way to invest in a mutual fund. Through an SIP, you invest a small sum at regular intervals in a fund plan of your choice. To make your tax-saving investment seamless, you can invest in ELSS through an SIP.

How to redeem ELSS mutual funds?

You can redeem only those ELSS fund units that have completed a lock-in period of three years. To redeem your ELSS fund units, you need to log in to your investment account held with the fund house and place a ‘redemption request’. Your transaction will be processed within five working days. Alternatively, you can redeem your units on the website of RTAs and the third party through whom you bought the units.

Why ELSS is tax-free?

The redemption proceeds of ELSS are not entirely tax-free. The long-term capital gains of up to Rs 1,00,000 a year are tax-free, and any gains above this limit attract a long-term capital gains tax at the rate of 10% plus applicable cess and surcharge. Any dividends received from your ELSS investments are added to your overall income and taxed at your income tax slab rate. Despite the redemptions proceeds of ELSS being taxed, it is the best tax-saving investment option under Section 80C of the Income Tax Act, 1961.

What is ELSS and how it works?

An ELSS or equity-linked savings scheme is a tax-saving investment option under Section 80C of the Income Tax Act, 1961. ELSS funds are equity-oriented, and at least 65% of their portfolio consists of equity-linked securities. The debt and money market instruments form the remaining part of the portfolio. Investments made in an ELSS fund are locked-in for a period of three years, and there are no provisions to pay the penalty and redeem your units within the lock-in period. Since ELSS funds are locked-in for three years, there is no possibility of realising short-term capital gains. Therefore, you can realise only long-term capital gains. These gains of up to Rs 1 lakh a year are made tax-free, and any gains above this limit attract a long-term capital gains tax at 10%.

How to stop SIP from ELSS?

To stop your ongoing SIP into an ELSS, you have to log in to your investment account held with the fund house and fill the ‘stop SIP’ form. Once that is done, you need to inform your banker to stop the ECS facility or standing instructions given to them. If you are not tech-savvy, then you can submit an offline application form to the branch of a fund house or a registered RTA.

Why ELSS is better than PPF?

Public Provident Fund (PPF) and Equity-Linked Saving Scheme (ELSS) are the two of the most popular tax-saving investment options under Section 80C of the Income Tax Act, 1961. The returns offered by PPF is restricted and revised on a regular basis by the Government of India. On the other hand, the return potential of an ELSS is not capped and, more often than not, has provided much higher returns than PPF when the investment horizon has been more than five years. Also, PPF comes with a lock-in period of fifteen long years while it is just three years with ELSS. Shorter lock-in period, higher return potential and the ease of investing have made ELSS the best Section 80C investment option.

What is lock-in period ELSS?

Like all other Section 80C investment options, ELSS mutual funds also come with a lock-in period; it is three years. A lock-in period is defined as the timeframe before which the investments cannot be redeemed. Some investments allow premature withdrawals in exchange for a penalty, but there are no such provisions in the case of ELSS. You cannot redeem your investment before the elapse of three years from the date of investment.

How does ELSS SIP work?

A systematic investment plan or SIP is the most convenient way of investing in mutual funds. It allows you to stagger your investment over time. You can invest a small sum at regular intervals. Your SIP frequency can be weekly, monthly, quarterly or bi-annually, as per your comfort. Through every SIP instalment, you purchase a certain number of fund units corresponding to your SIP’s ticket size. The amount invested through every SIP is counted towards deductions under Section 80C of the Income Tax Act, 1961. The maximum deduction you can claim is Rs 1.5 lakh.

Which is better mutual funds vs ELSS?

An ELSS is a mutual funds class that provides tax deductions under Section 80C of the Income Tax Act, 1961. If you are to claim tax rebate under this Section, then you should essentially invest in an ELSS fund. On doing so, you can reduce your taxable income by up to Rs 1,50,000 a year, which helps you save up to Rs 46,800 a year in taxes. Once you have exhausted your Section 80C limit, you may consider investing in other mutual funds classes, depending on your requirements and risk profile.

What is the difference between ULIP and ELSS?

Both ULIP and ELSS provide tax deductions under Section 80C of the Income Tax Act, 1961. An ELSS is an equity-oriented mutual fund that invests at least 65% of its equity and equality-linked securities portfolio. On the other hand, ULIP is a financial product which combines insurance with investment. The premium you pay towards ULIP is split into investments and actual premium towards a policy. Since only a certain portion of your premium goes towards investments, the returns are curtailed.

On the other hand, ELSS has the potential to offer higher returns as there is no policy tied with it which needs a premium. If you are looking for higher returns with no insurance cover, then you can choose to invest in ELSS. If you want both investments and insurance in one product, then ULIP is the right choice.

What happens to ELSS after 3 years?

ELSS mutual funds come with a mandatory lock-in period of three years. You cannot redeem your holdings within this period. Once the lock-in period elapses, you can either redeem your fund units or continue to stay invested. There is no rule which says you have to redeem your ELSS fund units after the lock-in period of three years have gone by.

How to get ELSS investment proof?

You can download your ELSS investment proof by logging into your investment account held with your fund house. Alternatively, if you had invested through a third party, then you could also get your proof of investment on their portal.

How to know if mutual fund is ELSS?

An ELSS is a mutual fund class that offers tax deductions under Section 80C of the Income Tax Act, 1961. To check if a fund is an ELSS or not, you need to check for its details on the fund house’s website. If you are investing via a third party, the same information will also be available on their website.

What is the risk in ELSS?

Since ELSS is an equity-oriented mutual fund, it essentially carries all the risks that any other equity fund plan. All ELSS mutual funds are affected by the market risk, volatility risk and concentration risk. If you are a risk-averse investor, then you may consider investing in other Section 80C investments.

ELSS comes under which Section of 80C?

ELSS mutual funds provide tax deductions under Section 80C of the Income Tax Act, 1961. If you are a salaried individual, then you have to provide your proof of investment to your HR to avoid higher TDS deductions.

How to switch ELSS?

You need to note that switching funds result in the redemption of the fund units you already hold. Also, switching of funds is allowed only between the funds offered by the same fund house. As per the SEBI’s mandate, a fund house cannot offer two different fund plans under the same category. Therefore, there is no switch option when it comes to ELSS as the same fund house cannot offer more than one ELSS fund plans. Alternatively, you can redeem your current ELSS fund units and purchase the units of another ELSS fund of your choice.

Do I get full money when I redeem ELSS?

You have the option of either redeeming your ELSS investment fully or partially, depending on your requirements. However, you cannot redeem those units that have not completed the mandatory lock-in period of three years.

Is ELSS better than PPF?

ELSS is a suitable tax-saving investment for investors with higher risk tolerance. It is one of the few tax-saving investments under Section 80C that invests predominantly in equities. However, PPF is a suitable investment for conservative investors and has the potential to offer inflation-beating returns over time. You can choose between ELSS and PPF based on your risk tolerance.

Can I withdraw ELSS after three years?

Yes, you can withdraw ELSS after the mandatory lock-in period of three years

What are the disadvantages of ELSS?

• You cannot withdraw your ELSS investments before three years, making it an illiquid instrument. PPF and bank FDs allow you to withdraw prematurely subject to certain conditions. 
• ELSS invests predominantly in stocks and bears risks similar to other equity investments. 
• Some ELSS funds have a higher allocation towards the mid-cap and small-cap segment, making them unsuitable for investors with lower risk tolerance. 

Suppose I stop investing in ELSS after three years and want to redeem after the 4th year or 5th year. Can I?

ELSS has a mandatory three year lock-in period. If you had invested a lump sum in ELSS, all your units are allotted on the same day. You can redeem your investments at one go after the three year lock-in period.

If ELSS is invested through a monthly SIP, when can you redeem the investment made in the 36th month?

If you invest in ELSS through the SIP route, every SIP instalment is treated as a new investment. It means every SIP instalment has a three year lock-in period. 

Date of SIP Investment	Date after which investment can be redeemed
01 January 2019	02 January 2022
01 February 2019	02 February 2022
01 March 2019	02 March 2022
01 April 2019	02 April 2022
01 May 2019	02 May 2022
01 June 2019	02 June 2022
01 July 2019	02 July 2022
01 August 2019	02 August 2022
01 September 2019	02 September 2022
01 October 2019	02 October 2022
01 November 2019	02 November 2022
01 December 2019	02 December 2022

You can redeem the investment made in the 36th month exactly three years later.