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 of 3 years across all other tax saving instruments 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 professionally managed by experienced finance person called as Fund Managers 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 1,50,000 on a financial 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 as per Long Term Capital Gains (LTCG) 12.5% above Rs. 1.25 Lakh. Despite the change, ELSS has continued to dominate as the most preferred option by investors among all other Section 80C investment options available in the market.

Types of ELSS Funds

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

Growth plans:

Growth Funds are very useful for long-term wealth creation schemes for investors where the full value of the fund is realised at the time of redemption.

IDCW plans:

IDCW stands for Income Distribution Cum Capital Withdraw plan, SEBI has replaced the term “Dividend option” to “IDCW” in mutual funds on APRIL 2021. Where the amount received via dividend from IDCW payouts are taxed at the “Income from other sources”, plus a 10% tax deduction at source (TDS) if the amount exceeds ₹5,000 in a financial year. 

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.

Why ELSS have Higher Returns on Investment (ROI)?

Given that ELSS invests predominantly in the equity instruments, the returns are much higher than most of the other 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.

ELSS Have Shorter Lock-in Investment Tenure?

ELSS has a 3-year 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 period .

Flexibility in ELSS vs ULIP

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 1.25 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 on ELSS

NPS vs 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 compared to NPS as it has the potential to provide higher returns and come with a lock-in period of just three years. On the other side, NPS investments are locked-in until your retirement.

PPF vs 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.

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. 

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.

Returns in ELSS are tax-free?

The redemption proceeds of ELSS are not entirely tax-free. The long-term capital gains of up to Rs 1,25,000 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 if any. 

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.

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.

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 ELSS is just three years with ELSS. Shorter lock-in period, higher return potential and the ease of investing have made ELSS the best in Section 80C investment option.

What is lock-in period in ELSS?

Like all other Section 80C investment options, ELSS mutual funds also come with a lock-in period of 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.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.