ELSS Funds – What is ELSS?, Invest in Best Equity Linked Savings Scheme Funds & Save Taxes
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ELSS Funds – What is ELSS? – Invest in Best Equity Linked Savings Scheme Funds & Save Up to Rs 46,800 a Year in Taxes
- Save up to Rs 46,800 a year in taxes
- Potential to offer the highest returns among all 80C options
- Lock-in period of 3 years, the shortest among all 80C options
- Get your investment proof instantly
Why are ELSS Mutual Funds the Best Tax-Saving Option?
Investing in ELSS mutual funds comes with the dual benefit of tax deductions and wealth accumulation over time. ELSS mutual funds have a lock-in period of just three years, the shortest among all tax-saving investments and have the potential to offer the highest returns among 80C options.
The shortest lock-in period of just 3 Years
2x returns of FD/PPF
Option to invest a small amount every month (SIP)
Invest as low as Rs 100 a month
What is an ELSS fund?
An ELSS fund or an equity-linked savings scheme is the only kind of mutual funds eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. You can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.
ELSS mutual funds’ asset allocation is mostly (65% of the portfolio) made towards equity and equity-linked securities such as listed shares. They may have some exposure to fixed-income securities as well. These funds come with a lock-in period of just three years, the shortest among all Section 80C investments.
What are the features of ELSS funds?
The following are the main features of ELSS mutual funds:
- They offer tax deductions of up to Rs 1,50,000 a year under Section 80C provision
- ELSS funds come with a lock-in period of three years, and there are no provisions to make a premature exit
- You can invest any amount in ELSS, there is no upper capping, while the minimum investable amount varies across fund houses
- ELSS funds are the only tax-saving investment with the potential to offer inflation-beating returns
- Investing in ELSS funds gives you the twin benefits of tax deductions and wealth creation
- The portfolio of an ELSS fund mostly consists of equities, while they have some exposure towards fixed-income securities as well
What are the tax benefits offered by ELSS funds
ELSS mutual funds provide tax deductions of up to Rs 1,50,000 a year under the provisions of Section 80C of the Income Tax Act, 1961. This helps you save up to Rs 46,800 a year in taxes. However, note that your investments are locked-in for three years from the date of investment.
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What are the factors to consider before investing in ELSS
You have to consider the following factors while choosing to invest in an ELSS mutual fund:
- Investment horizon: You need to have an investment horizon of longer than five years to consider investing in ELSS funds. The equity exposure of ELSS funds requires you to have a longer investment horizon in order to mitigate market volatility.
- Returns: You need to understand that ELSS funds do not provide guaranteed returns as they are dependent entirely on the performance of the underlying securities. However, having an investment horizon of longer than 5 years can provide higher returns than any other tax-saving investment option.
- Lock-in period: ELSS mutual funds come with a lock-in period of three years. Your investments are mandatorily locked-in for three years from the date of investment, and you cannot redeem your holdings until the completion of this period.
What should be the mode – SIP or Lumpsum
Investing via an SIP is advisable if you are not willing to take higher risk. When you invest through an SIP, you get the opportunity of investing in a fund across business cycles. This helps you get the benefit of purchasing the fund units across market cycles. When the markets are down, you buy more units while you purchase fewer units when the markets are bullish. Therefore, over time, your price of purchase of fund units gets averaged out and turns out to be on the lower side. You will benefit from this when the markets rise as you can realise higher capital gains on redemption. This benefit is not available if you invest a lump sum.
Investing a lump sum is not advisable unless the markets are gripped by a bearish trend, and you are willing to take higher risk levels and have a longer investment horizon. You miss out on the opportunity to purchase fund units across business cycles, which requires you to stay invested for longer than 5-7 years to realise good gains.
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Comparison of ELSS With Other Tax-Saving Instruments
There are various tax-savings schemes to help you accumulate wealth over time, such as FD, PPF and NSC to name a few. But the returns offered by these schemes are restricted. This is where ELSS stands out – its returns are generally higher, especially when the markets are on the bullish trend. This, coupled with a lock-in period of just three years, makes ELSS mutual funds the best tax-saving investment option. Even the post-tax returns of ELSS are much more attractive than that of any other tax-saving investment option.
| Investment | Returns | Lock-in Period | Tax on Returns |
|---|---|---|---|
| 5-Year Bank Fixed Deposit | 4% to 6% | 5 years | Yes |
| Public Provident Fund (PPF) | 7% to 8% | 15 years | No |
| National Savings Certificate | 7% to 8% | 5 years | Yes |
| National Pension System (NPS) | 8% to 10% | Till Retirement | Partially Taxable |
| ELSS Funds | 15% to 18% | 3 years | Partially Taxable |
Section-80C of the Indian Tax Act allows deduction upto Rs. 150,000 from your total annual income. Yet, many taxpayers find a major chunk of this getting consumed by mandatory deductions.
1.5 Lakh Investment in ELSS will double in 5 years
Lowest lock-in period of 3 years
Why Should You Invest in ELSS Mutual funds With ClearTax
ELSS is one of the few tax-saving investments that give you the benefit of Equity Linked Savings Scheme exposure—thereby enabling you to unleash the potential to earn much higher returns as compared to bank FDs, Provident Funds, NSC, and other tax-saving investment options.
Easy to Invest
Invest in top-performing funds handpicked by our in-house experts
Easy to track
Track / monitor your investments 24/7
Easy to withdraw
Withdraw anytime in 1-click with no paperwork
Paperless
The entire investment process is paperless and hassle-free
Bank graded security
Data security is our priority, and all your investments are completely secure
Investment proof for HR
You get your investment proof instantly and submit to HR.
FAQs (Frequently Asked Questions) on ELSS Mutual funds
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.
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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.
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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.
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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
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How ELSS works?ELSS mutual funds are a class of mutual funds that invest majorly in equity and equity-linked securities such as shares. They are the only kind of mutual funds that are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a tax rebate of up to Rs 1,50,000 a year and save up to Rs 46,800 in taxes. These funds invest a minimum of 65% of their portfolio in equities while the remaining portion may be allocated towards fixed-income securities. These funds come with a lock-in period of three years, the shortest among all Section 80C investments.
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How to start investing in ELSS?In order to invest in ELSS, you first need to undergo KYC verification. For this, you are required to furnish your photo in the prescribed format, PAN and valid address proof. Before you invest in ELSS, you must understand that your investment will be locked-in for a period of three years from the date of investment. Once you are ready to invest in ELSS, all you have to do is follow these steps:
- Log onto the following page
- Select ‘tax-saving’ under category
- Choose the fund of you’d like to invest in
- Click on ‘invest now’ and complete the simple steps shown
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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How to redeem ELSS after 3 years?You can redeem only those ELSS fund units (investments) that have completed a lock-in period of three years. You have two ways of redeeming your investments made in mutual funds. One, opting for a one-time lump sum withdrawal – only the investments completing lock-in period will be available for redemption. Two, initiate a systematic withdrawal plan or SWP. It is a process of withdrawing a fixed sum at regular intervals.
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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.
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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.
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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.
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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.
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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.
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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%.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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