Great! You have sucessfully subscribed for newsletters for investments
As the name suggests, Equity Linked Saving Scheme or ELSS is a type of mutual fund scheme that primarily invests in the stock market or Equity. Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act. The advantage ELSS has over other tax Saving instruments is the shortest lock-in period of 3 years. This means you can sell your investment only after 3 years, from the date of purchase! However to maximise returns from ELSS funds, it is recommended to keep your investments intact for the maximum duration possible. If you have an ELSS SIP (Systematic Investment Plan), each instalment has a lock-in period of three years, which means each of your instalments will have a different maturity date.
ELSS Funds are diversified equity funds. These funds primarily invest in stocks of listed companies in a specific proportion according to the investment objective of the fund. The stocks are chosen from across market capitalisation (Large Caps, Mid Caps, Small Caps) and industry sectors. These funds aim to maximise capital appreciation over the long run. The fund manager picks stocks after conducting an in-depth market research to deliver optimal risk-adjusted portfolio returns.
Investments made in an ELSS fund are eligible for tax benefits under Section 80C of the Income Tax Act, 1961. While there is no upper limit to the amount that can be invested, a maximum of Rs. 1.5 lakh is eligible for a tax deduction as per the Income Tax rules and save up to ₹46,800 a year as tax amount.
When you are a salaried employee, there is a certain amount that goes towards Employee Provident Fund (EPF) which is a fixed income product. If one wants to balance out risk & return on their investment portfolio then ELSS is the best option. In addition to the upside of extraordinary returns, investments in ELSS are also eligible for tax deduction under section 80C. While Unit Linked Insurance Plans (ULIPs) and the National Pension Scheme (NPS) also do the same, they have a higher lock-in period & lesser potential of returns. For instance, ULIPs have a lock-in period of five years. NPS is more of a retirement solution with partial exposure to equity and the invested amount is locked till the age of 60 years. With an ELSS fund, you have the shortest lock-in period of only three years.
If you are a new investor, ELSS is an ideal choice, since in addition to tax benefits you get a flavour of equity investing and mutual funds. Yes, equity investments do carry a higher risk, but that is generally over the short term. If you invest for more than five years, the risk is much lower. Like all equity investments, the best way is to start investing in monthly SIPs through the year. SIP in a ELSS fund helps you to accumulate more units when the market is in red and generate exceptional returns when the markets are favourable. Read our blog on Why ELSS should be your first Mutual fund? to understand the benefits in detail.
It is sometimes a tedious task to choose a fund - the right way is to analyse and compare different parameters of various funds before choosing one. That’s not all - investing in a fund is dependent on an individual’s financial goals, investment horizon, and risk appetite. The following table shows the top-performing ELSS funds based on the past three years returns.
|Fund Name||3-year Return (%)*||5-year Return (%)*|
|Quant Tax Plan Direct-Growth||44.22%||23.64%||Invest|
|Canara Robeco Equity Tax Saver Direct- Growth||26.03%||17.09%||Invest|
|Mirae Asset Tax Saver Fund Direct-Growth||23.99%||16.32%||Invest|
|IDFC Tax Advantage (ELSS) Direct Plan-Growth||26.12%||14.28%||Invest|
|Kotak Tax Saver Fund Direct-Growth||23.18%||14.19%||Invest|
*Last updated as on 12th Sep 2022
Here's a look at the advantages of ELSS Mutual Funds:
Capital gains from ELSS get the same treatment in Income Tax Calculation as rest of the Equity Instruments. Short term capital gains (STCG) attract a tax of 15%, while Long Term Capital gains (LTCG) are only taxable if the gains exceed ₹1 lac during the financial year. LTCG attract a tax of 10% on the amount exceeding ₹1 lac. Read ETMONEY's blog on How Mutual Fund Investments are taxed to understand the taxation in detail.
ELSS or Equity Linked Saving Scheme funds are tax saving mutual funds, in which the majority of the funds are invested in equity schemes. The investments in ELSS receive tax benefit under section 80C of the Income Tax Act.
ELSS Mutual Funds have a lock-in period of 3 years.
Under section 80C, one can avail tax benefit of upto ₹46,800 by investing upto ₹1.5 lakhs per year in ELSS. You can also invest more than ₹1.5 lakhs in ELSS, but tax benefit can not be availed on the investment exceeding ₹1.5 lacs.
ELSS has great benefits over other conventional tax saving instruments like FDs, NPS, etc. It has the lowest lock in period and the returns are higher than the other tax-saving schemes.
ELSS works very well for Salaried Individuals as apart from the upside of higher returns, they can also avail tax benefits under Section 80C of the Income Tax Act. That said, ELSS is also suitable for those who are open to short term risk and can stay invested for a long time for better returns.