An equity linked savings scheme (ELSS) is a type of equity fund and the only mutual fund which qualifies for a tax deduction under Section 80C of the Income Tax Act. It comes with a statutory lock-in period of 3 years and qualifies for tax exemption of up to Rs. 1.5 lakh.
Like all other equity funds, the returns of an ELSS are also subject to long term capital gains tax (LTCG) at 10%. However, long term capital gains of up to Rs. 1 lakh per year earned on equity funds are exempt from tax.
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:
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 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.
Taxation: 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.
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, 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|
Top ELSS Mutual Funds Investments in 2018-19:
|Fund Name||1 Year Return||3 Year Return||5 Year Return|
|Axis Long Term Equity Fund||6.47%||14.75%||15.31%|
|Franklin India Taxshield Fund||5.89%||9.80%||12.64%|
|DSP Tax Saver Fund||11.71%||13.51%||13.35%|
|Reliance Tax Saver Fund||4.01%||6.71%||8.05%|
|ICICI Prudential Long Term Equity Fund||9.12%||11.57%||11.08%|
|Aditya Birla Sun Life Tax Relief ‘96 Fund||-0.49%||11.83%||13.97%|
|Invesco India Tax Plan||5.08%||13.82%||14.27%|
|Principal Tax Savings Fund||4.28%||12.91%||11.08%|
|Tata India Tax Savings Fund||13.51%||14.38%||15.68%|
|IDFC Tax Advantage Fund||2.80%||13.91%||13.60%|
*The returns data is based on the NAV of direct-growth variant of the schemes as on July 05, 2019.