Mutual funds are expected to deliver regular returns, generate wealth, and meet the financial objectives of the investors. Fund houses offer dozens of funds as investable options and Equity Linked Savings Scheme (ELSS) is one such category.
Investment into ELSS funds is deductible from taxable income under section 80C of the Income Tax Act of India, wherein the deduction is capped to Rs1.5 Lakhs in a financial year. This section covers several other options like PPF, NSC, etc. and the exemption limit of Rs1.5 Lakh is cumulative for all these specified investments. Income from ELSS schemes is classified as Long-Term Capital Gain (LTCG) and is taxed at 10% if the income is more than Rs1 Lakh (Note – capital gains taxes are subject to change)
ELSS funds invest most of their corpus into equity & equity-related instruments. This equity investment happens across the sectors and the size of companies. Investment into ELSS comes with a mandatory lock-in period of three years from the date of investment. There is of course no outer limit and you may choose to remain invested for as long as you wish to continue. However, there is no possibility of any premature withdrawal from ELSS during the lock-in time.
Benefits of ELSS:
- Diversification – the corpus gets invested across the spectrum of companies – small to large – and across sectors, thereby providing diversification of your investment
- Minimal investment – in most ELSS schemes you can start with minimal investment and hence it allows a humble beginning
- Flexible investment options – ELSS schemes allow investment through both options, namely, lump sum and Systematic Investment Plan (SIP). Important to note here that a three-year lock-in period applies to each installment of the investment
- Tax exemption – principle investment through ELSS is deductible from taxable income under section 80C of Income Tax Act, capped at Rs1.5 Lakhs. While there is no limit to the investment that can be done through ELSS, the principle tax exemption is capped
- Tax savings and investment – There are many options if you are looking at only tax saving or only investment, but investment in ELSS offers dual benefits of tax savings as well as capital appreciation through investment into an equity asset class
- Financial discipline – lump sum or through a systematic investment plan, it is certain that you will save money and since the scheme imposes lock-in, the amount remains secure at least for the duration of lock-in
- Shortest lock-in – amongst other comparable tax saving investment options, ELSS offers the lowest lock-in period of only 3-years
- Reinvestment option – the ELSS schemes offer two options – dividend payout and dividend reinvestment. In the payout option you will get a dividend paid by the mutual fund, while in the second option, the dividend declared gets invested back into ELSS. Keep in mind that each investment (even dividend) comes with the mandatory lock-in period
How to invest in Equity Linked Savings Scheme?
The process to invest in ELSS is quite simple and straightforward. There are basically two ways:
- Online – investment is done directly through the website of fund houses (e.g. ICICI, AXIS, Aditya Birla, Kotak, etc.) or through websites of third-party platforms offering investing services (paisabazaar.com, etc.)
- Offline – this is the traditional model wherein you are required to submit investment forms to fund house branches and complete documentation formalities. You can also engage with a broker who does the same process on your behalf
Dozens of ELSS schemes are available across fund houses. You should analyze past returns, fund manager performance, expense ratio, etc. before deciding the right fund to invest into. You can choose to go ahead with one or multiple ELSS fund schemes.
Comparison with other tax saving investment options
Several schemes offer tax savings investment options, but ELSS has its advantages as you can see from below comparison table:
|Investment option||Expected annual returns||Lock-in period||Tax on returns|
|Public Provident Fund (PPF)||7-8%||15 years||Not taxable|
|National Savings Scheme (NSC)||6-7%||5 years||Taxable|
|National Pension Scheme (NPS)||7-8%||Until retirement||Partially taxable|
|5-year bank fixed deposit||5-6%||5 years||Taxable|
|ELSS||7-12%||3 years||Partially taxable|
To conclude on Equity Linked Savings Scheme
ELSS provides great benefits over the other tax-saving instruments like PPF, NSC, NPS, Bank FD, etc. Further, ELSS has the shortest lock-in period in this category of tax-saving investments and works especially well for salaried individuals as the principal amount is deductible from taxable income under section 80C of the Income Tax Act. Last but not the least, ELSS provides an option to passively invest in the equities asset class and possibly earn higher returns compared to other conventional tax-saving options. The ability to achieve higher returns over a longer period is primarily because of the flexibility the fund houses get as they choose to invest in equities across the spectrum of industries and small to large-sized companies.
Noteworthy to mention, ELSS investments are in the equity asset class and returns could be significantly high in a rising market. The flip side is that investment returns can be severely impacted in the case of a down-trending market situation. Please remember, any investment in the market is risky and hence the decision to invest in ELSS should be after due attention to your risk profile and in consideration of your financial goals and objectives.
The author of this article is a senior finance professional with over fifteen years of work experience in corporate finance and has an affinity towards the subject of personal finance and investment management. Please leave your comment or share thoughts on this article via email at email@example.com. For more articles, please visit the website www.decodefinance.in.
The article is based on the author’s knowledge, experience, and understanding of the subject. Any views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.
Under no circumstances the author shall be liable for any views or analysis expressed in this note. Further, the views expressed are not binding on any authority or Court. Readers are advised to consult their financial advisor for advice for their specific case.
5 Replies to “All about Equity Linked Savings Scheme (ELSS) mutual funds”
Well written with in depth knowledge.
Thanks for sharing this article which is self explanatory however I believe that investment in mutual fund shouldn’t be done only for saving tax instead it should be done for to increase the value of our hard core earned money, saving tax is added feature of investment in mutual fund.
thanks and regards.
Systematically explained article.