Equity Linked Savings Scheme is an open ended mutual fund scheme with a statutory lock in of 3 years and which invests a minimum of 80% of its assets in equities. It is the only mutual fund scheme in India which qualifies for tax deduction under Section 80(C) of the Income Tax Act.
Numerous Asset Management Companies (AMC) in India, offer ELSS funds to investors who want to earn high returns on investment in addition to availing tax benefits on your investment.
Why invest in ELSS?
ELSS offers investors an amazing opportunity to earn quality returns on your investment while saving taxes as well. Since there is a mandatory lock-in period of 3 years, it instils disciplined investment approach amongst consumers.
Tax exemption upto ₹1.5 lakh on investment, coupled with decent returns in the long run make ELSS one of the best investment options available to the investors.
What is the Best Time to Invest in ELSS?
ELSS offers tax saving opportunity to investors coupled with high returns, which works as an incentive for investors to opt for it. During the income tax filing season, many investors look for avenues to hoard their money and save taxes on that investment. This proliferates the number of individuals investing in ELSS.
However, it should be noted that gains from ELSS are high only if the money remains invested for a long term. Investors should have a long term investment horizon if they truly want to benefit from this mutual fund scheme. Tax exemption should be considered only as an add-on, and not the primary factor that drives your investment decision for ELSS.
Features of ELSS
1. Tax Benefit
The USP of Equity Linked Savings Scheme, is the tax saving benefit it offers. Investments upto ₹1.5 lakh are eligible for deduction from your taxable income, provided it remains locked in for 3 years in the scheme. Also, Long Term Capital Gains upto ₹1 lakh from ELSS are also exempted from tax.
2. Lock-in Period
To avail the tax benefit provided by ELSS, an investor should remain invested in the scheme for a minimum duration of 3 years. This inculcates good investing habits amongst consumers, who find it hard to save.
It should be noted that if an investor invests via Systematic Investment Plan (SIP) in ELSS, each monthly installment need to complete 3 years from the date of investment to be exempted from applicable taxes.
3. High Returns
ELSS invests predominantly in market-linked instruments, such as equities which yield high returns in the long run. Compared to other tax-savings options such as Public Provident Fund (PPF), Tax-saving Fixed Deposits (FDs), ELSS has fared well in terms of return on investment.
ELSS vs Other Tax-Saving Investment Instruments
Besides ELSS, there are various other tax-saving investment instruments, for example, 5-year fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), etc. However, ELSS is the best tax-saving investment instrument on the basis of the following reasons:
ELSS has the minimum lock-in period among all tax-saving investment options. ELSS has a lock in period of 3 years, whereas tax-saving FDs have a lock-in of 5 years. Similarly, PPF has a lock-in period of 15 years, NSC has it for 5 years and the National Pension Scheme NPS has it till the retirement age of the investor.
|Tax-saving Investment Option||Lock-in Period|
|Fixed Deposit||5 years|
|Public Provident Fund||15 years|
|National Savings Certificate||5 years|
|National Pension Scheme||Till retirement|
Being a market-linked investment instrument, an ELSS has the potential of generating superior returns than other tax saving investment options. An ELSS can provide you returns ranging between 15%-18%, whereas the returns of other tax-saving instruments are as follows:
|Tax-saving Investment Option||Return (p.a.)|
|Public Provident Fund||8%|
|National Savings Certificate||8%|
|National Pension Scheme||10.81%*|
*5-year weighted average return (with 50% in equity and 25% each in corporate bonds and government bonds) of NPS Tier-1 schemes; Returns are not guaranteed.
Like all other tax-saving investment options, the amount invested in an ELSS is tax-deductible up to Rs. 1.5 lakh under section 80C of the Income Tax Act. However, unlike other tax-saving investment instruments, the returns generated from an investment in ELSS and NPS are only partially taxable and not fully taxable. The long-term capital gains of up to Rs. 1 lakh on ELSS are exempt from tax.
- Systematic Investment Plan (SIP)
In case of tax-saving instruments other than ELSS, such as tax-saver FD, only lump sum deposits are acceptable. Whereas, you can invest in an ELSS with a system investment plan (SIP) which allows you to deposit small amounts at regular intervals which can be as low as Rs. 500 per month.
However, you must remember that being a market-linked instrument, an ELSS involves a higher amount of risk than other tax-saving investment options.
|Tax-saving Investment Option||Investment Risk|
|National Pension Scheme||Moderate|
|Public Provident Fund||Low|
|National Savings Certificate||Low|
Frequently Asked Questions
A. What is the lock-in period?
A. Lock-in period refers to the time period for which the money should remain invested in mutual fund scheme, to avail tax benefits.
Q. What is the maximum tax benefit that can be availed by investing in ELSS every year?
A. A maximum investment of ₹1.5 lakh in ELSS is exempted from taxable income in a financial year under Section 80(C) of the IT Act.
Q. How does ELSS SIP work?
A. ELSS SIP works same as SIP for any other type of mutual fund scheme, except for the fact that each SIP needs to be locked-in for a minimum of 3 years, if the investor want to avail the tax benefit.
Q. Who should invest in ELSS?
A. Individuals who are looking for investment avenues which will yield decent returns in the long run, and provide tax-saving benefits should invest in ELSS.
Q. How much can one invest in ELSS in a financial year?
A. There is no limit on the investment that can be made in an ELSS in a financial year, however, it should be noted that investment upto only ₹1.5 lakh is exempted from tax.
Q. How can I invest in ELSS funds?
A. Visit Paisabazaar app or website where you can compare ELSS of different AMCs and choose accordingly. You need to make an account and go to Tax Saver Funds to invest in ELSS.
Q. Are ELSS funds risky?
A. Like all other market-linked mutual fund schemes, ELSS is also subject to market risk because of extreme exposure to equity and equity related instruments.
Top ELSS Mutual Funds Investments in 2019-20:
*The returns data is based on the NAV of direct-growth variant of the schemes as on 17-Oct, 2019.