An Equity-Linked Savings Scheme (ELSS) is a type of equity fund and the only mutual fund which qualifies for a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act.
Top 10 ELSS Tax Saving Funds for FY 2019-20:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns||AUM|
|Aditya Birla Sun Life Tax Relief 96||6.62%||13.49%||11.61%||₹ 8,912 crore|
|Axis Long Term Equity Fund||17.62%||17.74%||12.72%||₹ 1,9817 crore|
|Tata India Tax Savings Fund||16.32%||15.58%||13.67%||₹ 1,873 crore|
|Invesco India Tax Plan||15.68%||13.98%||11.08%||₹ 934 crore|
|Kotak Tax Saver||15.41%||10.84%||11.32%||₹ 947crore|
|DSP Tax Saver Fund||16.55%||13.53%||11.83%||₹ 5,642 crore|
|ICICI Prudential Long Term Equity Fund||9.33%||11.89%||8.96%||₹ 6,424 crore|
|Franklin India Taxshield Fund||8.31%||10.09%||8.86%||₹ 4,069 crore|
|IDFC Tax Advantage Fund||2.07%||13.05%||10.01%||₹ 2,062 crore|
|L&T Tax Advantage Fund||2.36%||11.16%||9.44%||₹ 3,420 crore|
|Motilal Oswal Long Term Equity Fund||15.09%||15.63%||-||₹ 1,388 crore|
|Mirae Asset Tax Saver||15.25%||19.13%||-||₹ 2,111 crore|
|Principal Tax Savings Fund||2.16%||11.45%||8.73%||₹ 415 crore|
Note: Returns data is based on NAV (Net Asset Value) of direct-growth variant of the schemes as recorded on Nov 21, 2019. AUM data is as on Nov 21, 2019. Data Source: Value Research.
Why is ELSS the Best Tax-Saving Option?
Taxation of ELSS
Investments of upto Rs. 1.5 lakh made in ELSS qualify for an income tax deduction under the Section 80C of the Income Tax Act. This implies that if you have invested in ELSS, you can deduct the amount of your investment in an ELSS from your total income in order to eventually reduce your taxable income (or taxes).
For example- Mr. X earns Rs.10 lakh per annum. On this income, he is liable to pay an income tax of 20%. If he does not invest any part of his income, he will be paying Rs. 1,25,000 (5% tax on 5 lakh- 25,000 and 20% on remaining 5 lakh- 1,00,000) as tax (excluding the amount of Educational cess).
Now if he invests Rs. 1.5 lakh in ELSS, he will be liable to pay income tax on Rs. 8.5 lakh (10 lakh- 1.5 lakh). Hence, the amount of tax that he will pay will be Rs. 95,000 (5% on 5 lakh and 20% tax on 3.5 lakh) as tax (excluding the amount of Educational cess).
All the data mentioned in the above video is as on March 31, 2019.
Advantages of ELSS
ELSS is the best tax-saving instrument available under Section 80C of the Income Tax Act due to the following reasons:
- Lock-in period: An ELSS features the shortest lock-in period of 3 years among all the tax-saving investment options including fixed deposits, PPF (Public Provident Fund), NPS (National Pension System), NSC (National Savings Certificate), etc. thereby offering greater flexibility in the medium term.
- High Returns: Being a market-linked investment instrument, ELSS has the potential of giving relatively higher returns than other tax-saving instruments. Since it invests in a portfolio of equity instruments, ELSS can provide you returns ranging between 15%-18%.
- Taxation: In addition to qualifying for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, ELSS provides other tax benefits as well. Unlike tax-saving fixed deposits, the returns generated by an ELSS are only partially taxable as long-term capital gains of up to Rs. 1 lakh on ELSS are tax-free.
- SIP option: An ELSS is the only tax-saving instrument that comes with a SIP (Systematic Investment Option). With the SIP option, an investor can invest an amount as low as Rs. 500 in an ELSS along with getting the benefit of the power of compounding.
Disadvantages of ELSS
Investing in Equity Linked Savings Scheme has the following drawbacks-
- Risk involved: In comparison with its investment counterparts (such as NSC and PP), investments in ELSS have higher level of risk involved as it deals with equity instruments and related securities.
- Unavailability of Partial Redemption: The amount invested in an ELSS scheme can be withdrawn only after the tenure of 3 years is over. In comparison, other investment options such as Fixed Deposits, etc. do not have such conditions.
Comparison of Tax Saving Investment Options in India
|Tax-Saving Investment Options||Lock-in Period||Return||Risk Profile||Tax on Returns|
|ELSS||3 years||15%-18%||High||Partially Taxable|
|5-Year Bank Fixed Deposit||5 years||6.50%-8.25%||Low||Yes|
|Public Provident Fund (PPF)||15 years||8%-10%||Low||No|
|National Savings Certificate (NSC)||5 years||8%||Low||Yes|
|National Pension System (NPS)||Till retirement (60 years of age)||10.81%*||Moderate||Partially Taxable|
*5-year weighted average return (with 50% in equity and 25% each in corporate bonds and government bonds) of NPS Tier-1 schemes. Returns not guaranteed.
How to Evaluate the Best ELSS Mutual Fund?
Since an ELSS is a market-linked investment instrument, it is an ideal tax-saving option for people seeking potentially high returns and who are willing to undertake a relatively high level of risk. However, over the long-term periods of 5 years and more, an ELSS investment is capable of not only generating wealth for you but also of appreciating it at a rising pace.
People who are risk averse and who do not wish to remain invested in an ELSS for a longer duration, can invest their money in relatively safer tax-saving investment instruments like fixed deposits and Public Provident Fund.
How to Invest in ELSS through Paisabazaar.com?
Individuals can invest in ELSS through Paisabazaar.com using both online and offline modes. The requirements for both are as follows-
- Online Investment: To invest in ELSS using the online medium, investors must complete their online registration by doing Aadhar-based KYC. Once the verification is done, you will receive a pre-filled bank mandate on your email, post which a final confirmation email with your FATCA details from NSE will be sent.
- Offline Investment: To invest using the offline mode, you still need to complete your KYC first. For this, you will be required to carry documents such as Aadhaar, PAN card, post dated cheques in favor of the mutual fund scheme are submitted with the bank. Investors can also contact the fund advisor for the same.
You can read more about how to invest in ELSS Mutual Funds here.
Frequently Asked Questions (FAQs)
Q- What is the lock-in period in ELSS?
Ans- An ELSS comes with a lock-in period of 3 years, which means that any investment made in an ELSS cannot be withdrawn before the completion of 3 years from the date of investment. After the completion of the 3-year period, it is up to the investors if he/she wishes to withdraw his/her money or leave it in the scheme where it will continue to earn returns. It is important to note that among all the tax-saving investment instruments, an ELSS features the shortest lock-in period. Other tax-saving instruments, for instance, fixed deposits come with a lock-in period of 5 years and Public Provident Fund (PPF) features a lock-in of 15 years.
Q- What kind of return does an ELSS give?
Ans- Being a market-sensitive investment instrument, an ELSS has the potential of generating returns greater than other tax-saving investment vehicles. An ELSS can provide you returns ranging between 15%-18%.
Q- How is an ELSS Taxed?
Ans- As mentioned above, an ELSS investment qualifies for a tax deduction of up to Rs 1.5 lakh per annum. Like all the other mutual funds, an ELSS can generate earnings for its investors in two forms – dividends and capital gains (the difference between the redemption value and the purchase price). The tax treatment for dividends and capital gains is different. Capital gains can be divided into Short-Term Capital Gains (holding period less than 1 year) and Long-Term Capital Gains (holding period 1 year and more). An ELSS does not result in short-term capital gains as it comes with a lock-in of 3 years. Long-term capital gains earned on an ELSS are taxed at the rate of 10%. Long-Term Capital Gains of up to Rs. 1 lakh per year are exempt from tax on all equity funds including ELSS.
Dividends declared on an ELSS are subject to a Dividend Distribution Tax (DDT) of 10%. The tax is imposed when the fund pays out a dividend and taxable at the hands of the fund house. This means that an investor is not required to pay the DDT as the dividends received by him/her have already been taxed.
Q- What are the minimum and maximum amounts of investments which can be made in an ELSS?
Ans- The minimum investment amount in an ELSS varies from scheme to scheme but generally stands at Rs. 5000 for lump sum investments and Rs. 500 for SIP investments. There is no maximum amount for investment in any mutual fund scheme. However, the maximum tax benefit which an investor can get by investing in an ELSS is subject to a limit of Rs. 1.5 lakh under section 80C of the Income Tax Act, 1961.
Q- Does an ELSS qualify for the benefit of indexation?
Ans – No, an ELSS does not qualify for the benefit of indexation. Only debt funds qualify for the benefit of indexation. The benefit of indexation means that the purchasing price of an investment is adjusted to factor in inflation.
Q. Is ELSS taxable after 3 years?
Ans- Investments in ELSS come with a mandatory lock-in period of 3 years. Until this budget, these investments were considered tax-free. However, currently returns from these investments are taxed at 10% without indexation benefit as long term capital gains tax from equity mutual funds over Rs. 1 lakh.
Q. ELSS vs Tax Saving Fixed Deposit?
Ans – ELSS is a type of mutual fund that invests in equities whereas Fixed Deposits are traditional investment instruments wherein you can invest as a lump sum with the bank. The returns in ELSS are subject to market risk while the ones in FD are fixed. ELSS offer 10% LTCG tax on the gains over 1 lakh. FDs on the other hand, offer taxes as per the tax slab set by your bank.
Q. ELSS vs Public Provident Fund (PPF)?
Ans- Public Provident Fund is a government-backed saving scheme that provide guaranteed returns and added tax benefits under Section 80C. ELSS, on the other hand is a mutual fund scheme which is eligible for tax benefit under Section 80C of the Income Tax Act. Investments made in ELSS are subject to market risks and thus offer a higher level of risk, unlike investments in PPF. ELSS offers a lock-in period of 3 years, where as PPF has a mandatory lock-in period of 15 years.
Q. ELSS vs National Pension Scheme?
Ans- NPS is a government scheme wherein individuals invest during their working years in order to get a pension upon retirement. In ELSS, the entire amount is invested in equity while in NPS, 50% of the amount is invested in equity and the remaining in government bonds, treasury bills, etc. Long term capital gains over Rs. 1 lakh are taxable at 10% in ELSS, whereas the maturity amount in NPS is partially taxable.
Q. How much can one invest in ELSS in one financial year?
Ans- One can invest a minimum of Rs.500 in ELSS in a financial year. There is no maximum limit on the investment made in ELSS; however, it is suggested that an investment of Rs. 1.5 lakh be made in order to avail the tax benefits on the scheme.
Q. Is ELSS good for long term investment?
Ans- While investing in ELSS, one must be aware that the scheme comes with a lock-in period of 3 years. Hence, they are not beneficial if you have a shorter investment horizon. ELSS are a suggested investment option only in the long term.