Investing in ELSS of Tax Saving Funds gets you a tax deduction under Section 80 C of the Income Tax Act, 1961 for investment up to Rs 1.5 lakh per annum. You also have other deductions in this section such as 5 year tax-saver fixed deposits, EPF (Employees’ Provident Fund) and PPF (Public Provident Fund). If you are willing to accept a higher risk in return for a higher potential return, ELSS funds are the best product for tax saving under this section.
ELSS has a lock-in period of 3 years. Thereafter you can either withdraw your money or leave it in the ELSS fund where it will continue to earn returns.
How Much Tax Can You Save in ELSS Under 80C?
Tax saved by in ELSS*
0 – 5 lakh
5 – 10 lakh
Above 10 lakh
*Maximum tax deduction for ELSS under Section 80 C is for investment up to Rs 1.5 lakh.
For example, assume that your income is Rs 55,000 per month or Rs 6.6 lakh per annum. This puts you in the 20% tax slab. You invest Rs 1.5 lakh in an ELSS fund. The amount of Rs 1.5 lakh is reduced from your gross income and you do not have to pay tax on this income (Rs 1.5 lakh). Hence you save 20% of Rs 1.5 lakh which is Rs 30,000.
There is also a 4% health and education cess in India. After you factor this cess into your calculation, the actual tax saved by ELSS funds inceases further. Thus if you are in the 5% bracket, the tax saved becomes Rs 13,000 on a Rs 1.5 lakh ELSS investment. In the 20% bracket the tax saved becomes Rs 31,200 and in the 30% bracket, the tax saved becomes Rs 46,800.
Minimum and Maximum Amounts
Top 10 ELSS Mutual Fund Investments for 2019-20:
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns||Net Assets (Rs. Crore)|
|Axis Long Term Equity Fund||7.38%||15.97%||19.96%||16,999|
|Franklin India Taxshield Fund||4.76%||13.23%||17.13%||3,651|
|DSP Tax Saver Fund||3.86%||17.25%||18.94%||4,373|
|Reliance Tax Saver||-8.95%||11.32%||16.81%||9,630|
|ICICI Pru Long Term Equity||6.17%||15.28%||16.94%||5,386|
|Aditya Birla Sun Life Tax Relief ‘96||1.98%||16.84%||19.85%||6,628|
|Invesco India Tax Plan||6.53%||17.39%||19.85%||609|
|Principal Tax Savings Fund||-1.42%||17.88%||17.85%||374|
|Tata India Tax Savings||3.88%||17.42%||19.65%||1,417|
|IDFC Tax Advantage||-1.50%||17.99%||18.66%||1,614|
“The returns data is based on NAV of direct growth schemes as recorded on 14th March, 2019 and subject to change. AUM data as recorded on 30th September, 2018.”
Axis Long Term Equity Fund
Axis Long Term Equity Fund, launched on December 29, 2009 by Axis Mutual Fund is currently the star of the ELSS category. Its runaway success has caused its AUM to become the largest in the category at Rs 17,626 crore. The fund invests in companies with strong potential of generating wealth over the 3 to 4 year period. This strategy has worked well for its investors and led to significant popularity of this ELSS among retail investors. The scheme has consistently outperformed its benchmark and most ELSS mutual funds by a wide margin and it has held its own even in difficult years like 2018. Axis Long Term Equity Fund is large-cap oriented with about 73% of its investments allocated to large cap securities as of December 2018. The scheme has recorded 3 year returns of 11.69% and five year returns of 19.78% respectively (as of 7th January 2019).
Franklin India Taxshield
Launched in April 1999, Franklin India Taxshield has been a top performer in the tax saver mutual fund category for close to two decades now. Thus an investment of Rs 10,000 made into this scheme at inception would be valued at Rs 5,65,964 on 7th January 2019 indicative of a gain of around 57 times the original investment. The fund outperformed its benchmark in for the 5 year, 7 year and 10 year periods. It primarily invests in stocks with attractive valuations and strong growth prospects. This has allowed the fund to deal well with market crashes and outpace most peer funds during bull phases. With 71% of its investments in large cap companies (as of January 2019), it is well placed to contain the losses from future market corrections. R Janakiraman and Lakshmikanth Reddy, the fund managers for Franklin India Taxshield have been at the helm since May 2016.
DSP Tax Saver Fund
This is a large-cap oriented fund with around 74% of its investments in large cap companies. It follows a bottom-up investment style with a strong focus on good companies with attractive valuations and strong growth potential. DSP Taxsaver Fund has grown with a CAGR of around 13.27% since its launch over a decade back in January 2007 (as of 7th January 2019). It has delivered returns of 11.78% and 17.24% over the last 3 year and 5 year periods respectively. The split between DSP and Blackrock is not likely to affect the performance of this fund, as DSP Mutual Fund CEO Kalpen Parekh clarified in his exclusive interview with Paisabazaar. The fund has been managed by Rohit Singhania since July 2015. Rohit Singhania is co-head of equities along with Vinit Sambre who manages the popular DSP Small Cap Fund which restarted SIP inflows in September 2018.
Reliance Tax Saver Fund
Reliance Tax Saver Fund, considered as one of the most aggressive ELSS schemes in India, has beaten its benchmark (Nifty 100 TRI) over the past 5, 7 and 10 years along with most of its peers. The fund invests 56% of its assets in large caps, 29% in midcaps and 15% in small caps. The fund follows a mix of growth and value style of investing. Over the last 5 – 10 years, Reliance Tax Saver Fund has been able to outperform the average return of ELSS funds by 2-3 percentage points and its benchmark by even larger volumes. It has delivered returns of 13.52% (CAGR) since its launch date of September 21, 2005 and has generated about 16.43% and 18.06% over the last 5 year and 10 year periods. Ashwani Kumar, the scheme’s current manager, has been at its helm since 2005.
ICICI Prudential Long Term Equity Fund
This fund invests in companies with attractive valuations and good growth potential across various market capitalisations. It follows a value investment style, which allows it to outperform peer ELSS mutual funds during the initial bull market phases. It has generated over 21% (CAGR) returns since its launch date of August 19, 1999. The fund has outperformed its benchmark (Nifty 500) in the past 5 and 10 years, delivering 15.7% and 19.6% returns respectively (as of 7th January 2019). About 65% of its portfolio is invested in large cap companies, about 27% in midcaps, 6% in small caps and 4% in debt. George Heber Joseph had been this scheme’s fund manager since April 2015 and was replaced by Harish Bihani in November 2018. Mr Joseph has moved on to the newly licensed ITI Mutual Fund.
Aditya Birla Sun Life Tax Relief ’96
This fund aims to generate long term wealth for its investors by investing 80–100% of its portfolio in equities and the rest in debt and money market instruments. This fund is the one of best performing schemes from Aditya Birla Sun Life Mutual Fund and follows a mix of value and growth styles of investment. It has generated over 24.4% (CAGR) return since its launch on March 29, 1996. The fund is heavily tilted towards mid and small caps with 60% of its portfolio invested in such companies and only 29% invested in large caps (as of December 2018). It has generated over 12.14% and 18.92% (CAGR) returns over the last 3 and 5 year periods which show significant outperformance of the benchmark for the same periods (as of 7th January 2019). Ajay Garg has been managing the Aditya Birla Sun Life Mutual Fund since October 2006.
Invesco India Tax Plan
This fund was launched on December 29, 2006 and has delivered over 14% (CAGR) returns since then. It aims to achieve long term capital appreciation by investing in equities across all market capitalisations. As of September 2018, large cap securities form 75% of its portfolio while the rest 25% is held in mid-cap and small-cap companies as well as debt (2.7%). The fund invests in mid-cap companies with strong potential of benefiting from increase in domestic consumption. It has delivered over 11.6% and 17.6% (CAGR) returns over the 3-year and 5-year periods respectively (as of 7th January 2019), outperforming its benchmark over both time periods.
Tata India Tax Savings
This fund has delivered over 18.9% (CAGR) since its launch on March 31, 1996. It aims to generate long term wealth for investors by investing in companies with good fundamentals. It uses a mix of growth and value investment strategies for stock selection. As of December 2018, as much as close to 76% of this scheme’s portfolio was invested in large cap stocks with the rest being invested in mid caps (16.59%) and small caps (6.79%). It has generated 10.7% and 17.94% (CAGR) over the last 3-year and 5-year periods respectively. However, its high portfolio P/E multiple of 33.3 (as of January 2019) indicates a potentially significant risk of overvaluation for this fund’s investments leaving it vulnerable in case of market corrections. This fund is ideally suited for investors favouring a large cap approach with moderate risk appetite. Rupesh Patel has managed the Tata India Tax Savings Fund since April 2015.
IDFC Tax Advantage
This fund was launched on December 26, 2008 and has generated 18% (CAGR) return since then. This lesser known ELSS fund follows a mid and small cap approach with 52% of its holdings invested in mid and small cap companies. Another 6% of its assets is invested in debt, providing the fund manager with an opportunity to invest in a market correction. The fund follows a conservative investment approach by focusing on companies with low valuations and high growth prospects. Despite keeping a low profile and featuring one of the smallest AUMs among its peers, this scheme has delivered CAGR of around 11.39% and 15.86% for the past 3 year and 5 year periods, beating its BSE 200 TRI benchmark in both cases (as of 7th January 2019).
Principal Tax Savings Fund
This fund aims to generate long term returns by investing more than 80% of its assets in equity and equity-related instruments and the rest in debt and money market instruments. Currently, about 61% of this ELSS fund’s portfolio is held in giant and large-cap companies while the rest of the scheme’s assets are invested in mid-cap and small-cap companies (as of January 2019). with 2.36% held in cash and cash equivalent instruments. The fund has delivered 12.81% and 17.13% (CAGR) returns over the last 3 year and 5 year periods respectively, beating its benchmark (Nifty 500 TRI) by up to 3% over these time periods. Principal Tax Savings Fund is currently managed by P.V.K Mohan who has been managing the scheme since September 2010.
Choosing the Best ELSS Funds for 2018-19 Investments
Having generated returns of almost 20% annualized over the past 5 year period (as of January 2019), ICICI Prudential Long Term Equity Fund, Axis Long Term Equity and Reliance Tax Saver Fund can build a large corpus for you along with giving you the benefit of tax saving. These funds have significant exposure to midcap and small cap stocks which have high compounding potential. The other funds in our list also have powerful strengths of their own.
Carefully analyse your own risk appetite before selecting the ELSS funds. Although past performance of ELSS funds cannot guarantee their future performance, they can give you some idea of returns and can also tell you how a particular ELSS fund has dealt with past bear and bull market phases. Make sure to compare the performance of your chosen ELSS fund with its benchmark index and its peer ELSS mutual funds over the last 3 and 5 year periods before finally investing in that fund.
Best ELSS funds Portfolio Break-up in terms of market capitalization
|Fund Name||Portfolio Break-up (market capitalisation)|
|Giant Cap||Large Cap||Mid Cap||Small Cap|
|Axis Long Term Equity Fund||54.69||18.00||25.76||1.55|
|Franklin India Taxshield Fund||53.13||28.11||14.59||4.17|
|DSP BlackRock Tax Saver Fund||50.94||22.02||21.63||5.41|
|Reliance Tax Saver Fund||29.96||26.06||28.56||15.42|
|ICICI Prudential Long Term Equity Fund||51.50||15.13||27.14||6.24|
|Aditya Birla Sunlife Tax Relief 96||49.87||16.45||25.89||7.94|
|Invesco India Tax Plan||63.27||12.46||19.89||4.39|
|Principal Tax Savings Fund||45.99||14.80||20.53||18.30|
|Tata India Tax Saving||64.49||12.13||16.59||6.79|
|IDFC Tax Advantage||31.61||16.48||30.15||21.76|
*Fund data as per scheme information obtained on 7th Jan 2019.
Opt for ELSS funds like Axis Long Term Equity Fund, DSP BlackRock Tax Saver Fund, Franklin India Tax Shield Fund, Invesco India Tax Plan, Principal Tax Savings Fund ,ICICI Prudential Long Term Equity Fund, Reliance Tax Saver Fund, Birla Sunlife Tax Relief 96, Tata India Tax Saving and IDFC Tax Advantage if you have a strong risk appetite. ELSS funds invest atleast 80% of their assets in equities. If you want to save tax but do not want the risk of ELSS funds, you can go for saver options like PPF or a 5 year tax saver FD.
Best Tax Saver Mutual Fund Schemes
|ICICI Prudential Long Term Equity Fund|
|Aditya Birla Sun Life Tax Relief 96|
|Motilal Oswal Long Term Equity Fund|
|Axis Long Term Equity Fund|
|SBI Magnum Tax Gain|
|Reliance Tax Saver Fund|
Q. What is the full form of ELSS?
Ans – ELSS stands for Equity-Linked Savings Scheme.
Q. What is the maximum amount which can be invested in an ELSS?
Ans – The minimum application amount for an ELSS is Rs. 500. There is no maximum investment limit for any mutual fund including an ELSS. However, an investor must note that a maximum of Rs. 1.50 lakh invested in an ELSS qualify for a tax deduction under section 80C of the Income Tax Act, 1961.
Q. Till what time can I keep my money invested in an ELSS?
Ans – An ELSS comes with a lock-in period of 3 years. Thus, an investment made in an ELSS can be withdrawn before completion of 3 years of allotment of units to the investor. However, an investor is free to keep the investment in an ELSS for any period exceeding 3 years.
Q. How is an ELSS taxed?
Ans – An investment made in an ELSS qualifies for a tax deduction of up to Rs. 1.50 lakh under section 80C of the Income Tax Act, 1961. Since, ELSS is a type of an equity mutual fund scheme, the capital gains earned on it are taxed like any other equity scheme.
Short-term capital gains (holding period less than 1 year) are not applicable to ELSS as the tax-saving scheme comes with a lock-in period of 3 years. Long-term capital gains (holding period of 1 year and above) are applicable on ELSS and are taxed @ 10%. Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum.
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.