What is ELSS? - Invest in Best Equity Linked Savings Scheme Funds & Save Taxes

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.

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