What is ELSS: Benefits,Taxation, Investment Guide & Returns

What is Equity Linked Savings Scheme?

Equity Linked Savings Scheme (ELSS) is a kind of mutual fund scheme that predominantly invests in equity and equity related instruments to generate high returns.

What makes ELSS different from other equity mutual fund schemes is that investment upto ₹1.5 lakh in ELSS is eligible for deduction from taxable income in a financial year. The scheme comes with a statutory lock-in period of 3 years for each SIP. It is the only mutual fund scheme that qualifies for tax deduction under Section 80(C) of the IT Act.

Benefits of Investing in ELSS

• High Returns

Since Equity Linked Savings Scheme is essentially an equity scheme, it has the potential to deliver exponential returns in the long run. Although risky, investment in ELSS has the potential to deliver significantly higher returns when compared to traditional tax saving instruments. Moreover, ELSS has the lowest lock-in period amongst all other tax saving avenues.

• Tax Exemption

If your mutual fund savings  offers tax saving opportunity, along with high investment growth, what more can you ask for. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.

• Diversification

Investment portfolio of ELSS consists of balanced allocation to different asset classes such as equity and debt securities. Besides this, numerous funds diversify within the equity category as well, allocating assets to large cap, mid cap, small cap equity stocks. Via ELSS, one can easily diversify their overall investment portfolio and effectively mitigate market risk.

• Professional Management of Investment

As the investment portfolio is managed by professional experts who are well-informed about the market sentiment and functioning of capital markets, the investors’ money is in safe hands. Even if you don’t have much knowledge about the working of financial markets or lack time to track the market, you can still capitalize the returns from equity markets, via investment in ELSS.

• Disciplined Investment

Investment in ELSS requires a minimum lock-in of 3 years, which instills investment discipline amongst consumers. For a more efficient disciplined investment approach, you can also invest via Systematic Investment Plan (SIP) in ELSS, which requires periodic installments in the fund on predetermined date. However, it should be noted that each SIP installment remains locked-in for 3 years.

Tax Implications on Equity Linked Savings Scheme

As it has been mentioned above, investment  upto ₹1.5 lakh in ELSS is eligible for deduction from taxable income in the financial year. We can understand ELSS taxation with the help of following example:

Let’s say, an individual has ₹2 lakh disposable taxable income in a given financial year, and s/he decides to invest the amount in ICICI Prudential Long Term Equity Fund. Only ₹1.5 lakh out of this amount would be eligible for deductions, reducing your taxable income in that year. Keep in mind that is applicable if you do not have any other tax saving investments allowed for deduction under Section 80(C) of the IT Act.

You should also be aware of the capital gains tax that is applicable returns generated by equity mutual funds. The returns from this fund are taxed like that from any other equity mutual fund scheme. However, since the units can’t be redeemed before 3 years of investment, only Long Term Capital Gains Tax (LTCG) of 10% on gains above ₹1 lakh will be levied.

Suppose an investor has made a capital gain of ₹1.5 lakh on investment in this scheme at the time of redemption, LTCG of 10% would be levied on ₹50,000 in that financial year. ₹1Lakh in capital gains is exempted from taxation. The payable tax would be ₹5,000.

If an investor hasn’t made any investment in instruments eligible for tax exemption under Section 80(C) of the IT Act, s/he can make a lumpsum investment in ELSS during the tax filing season to save on payable taxes.

Who Should Invest in ELSS?

• ELSS offers an amazing opportunity to investors who want to reduce their tax liability along with high capital growth. If you’re looking for equity investment avenues that will deliver significant returns in the long run, you can opt for this fund.
• This scheme is suitable for investors with a long term investment horizon (preferably more than 3 years), as the fund has a minimum lock-in period of 3 years. Also, it has been observed that equity securities perform well in the long run, and this mandatory lock-in period ensures that the investors remain invested.
• As the underlying assets mostly comprise equity securities, which are quite volatile, it is important that the investor has a high risk appetite to invest in ELSS and a long term wealth creation goal.
• If you have already invested ₹1.5 lakh in various tax saving instruments under Section 80(C), it is advisable to opt for other equity funds that don’t have any lock-in period. Or you could even consider other tax saving instruments that can come under other sections to save tax for eg: health insurance for self/spouse/parents or National Pension System

How to Invest in ELSS Funds?

There are two ways through which a person can invest in ELSS:

• Online

You can invest in ELSS online seamlessly through online platforms (such as Paisabazaar.com) or directly through the websites of the Asset Management Companies (AMCs), offering the fund.

• Offline

This conventional mode of investment requires an investor to fill a form and submit it at the nearby branch of the fund house, or invest through a broker.

To know more about the investment procedure for mutual funds, visit: How to invest in Mutual Funds?

Best ELSS Funds to Invest in 2020

Fund Name	Returns (%)
	1 year	3 year	5 year	7 year	10 year
Axis Long Term Equity	-0.44	6.29	8.82	17.25	14.02
Mirae Asset Tax Saver	10.12	7.52	—	—	—
Invesco India Tax Plan	5.82	5.83	8.76	15.52	11.21
Aditya Birla Sun Life Tax Relief 96	4.31	2.28	8.01	15.31	9.78
DSP Tax Saver	-0.62	2.70	8.93	14.68	10.29
Kotak Tax Saver	5.24	2.64	8.11	14.51	8.49
ICICI Prudential Long Term Equity	1.11	3.38	6.80	13.37	9.61
Motilal Oswal Long Term Equity	-5.66	0.40	8.21	—	—
Tata India Tax Savings	0.76	2.68	8.63	14.53	10.92
Nippon India Tax Saver	-10.37	-9.16	0.65	11.32	7.25
Benchmark (S&P BSE 500 TRI)	3.99	4.26	8.53	12.28	8.26
ELSS category average	2.39	2.06	7.03	13.02	8.95

(Data as on October 20, 2020: Source: Value Research)

Also Read: Why invest in ELSS funds for saving tax