An equity linked savings scheme (ELSS) is a type of an equity mutual fund which invests at least 80% of its total assets in equity and equity-related instruments. An ELSS comes with a statutory lock-in period of 3 years and qualifies for a tax exemption under section 80C of the Income Tax Act which allows a maximum tax exemption of Rs. 1,50,000. The returns on ELSS funds are subject to a long term capital gains tax (LTCG) at 10%. However long term capital gains up to Rs. 1 lakh per year are exempt from tax.
ELSS vs Other Tax-saving Investment Instruments
Besides ELSS, there are various other tax-saving investment instruments also, for example, 5-year fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), etc. However, ELSS outperform on the basis of the following reasons.
Lock-in: 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|
Return: 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 follow:
|Tax-saving Investment Option||Return (An 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 not guaranteed
Taxation: Like all other tax-saving investment options, the amount invested in an ELSS is tax-deductible under section 80C of the Income Tax Act which allows a maximum tax deduction of Rs. 1,50,000. However, unlike other tax-saving investment instruments, the returns generated from an investment in an ELSS and a 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.
SIP option: 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, 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|
Top ELSS Mutual Funds Investments in 2018-19:
|Fund Name||1 Year Return||3 Year Return||5 Year Return|
|Axis Long Term Equity Fund||1.61%||10.40%||21.47%|
|Franklin India Taxshield Fund||-3.01%||8.69%||17.17%|
|DSP Tax Saver Fund||-7.71%||11.40%||17.83%|
|Reliance Tax Saver Fund||-19.53%||6.74%||19.09%|
|ICICI Pru Long Term Equity Fund||1.86%||10.08%||17.34%|
|Aditya Birla Sun Life Tax Relief ‘96 Fund||-3.33%||12.01%||20.14%|
|Invesco India Tax Plan||0.51%||10.10%||19.79%|
|Principal Tax Savings Fund||-8.35%||12.60%||18.13%|
|Tata India Tax Savings Fund||-6.82%||11.30%||18.55%|
|IDFC Tax Advantage Fund||-5.68%||12.73%||18.42%|
*The returns data is based on NAV of direct growth schemes as recorded on November 1, 2018 and subject to change.