What is an ELSS fund?
ELSS full form is Equity‑Linked Savings Scheme, which is a type of equity‑oriented cum tax savings mutual fund that invests primarily in equity and equity-oriented instruments and offers tax deductions under Section 80C of the Income Tax Act (up to ₹1.5 lakh per year, under old tax regime) while aiming for long‑term wealth growth. ELSS funds possess the potential for higher returns in the long term, although they are linked to market-related risks. These funds invest across different sectors and market capitalisations, which spreads the risk.
Among all tax-saving options under Section 80C, ELSS funds have the shortest lock-in period, which is just three years. Returns from ELSS funds after the lock-in period are classified as Long-Term Capital Gains (LTCG), which are tax-exempt up to ₹1.25 lakhs per annum, with profits above Rs. 1.25 lakhs taxed at 12.5% per annum. For long-term investors wanting to save on taxes while creating equity exposure, ELSS provides a compelling investment route which combines the dual benefits of tax efficiency and market growth potential. Investments in ELSS funds can be made either in a lump sum or through a Systematic Investment Plan (SIP), making it a flexible option for long-term corpus creation as well as efficient tax planning. It is ideal for investors who have a long-term investment horizon and are ready to bear some risk.
Why invest in ELSS?
For someone who wishes to invest in mutual funds and save on taxes Here are some ELSS fund benefits that you can expect.
Tax benefits
This is one of the most practical reasons. Investments in ELSS qualify for tax deductions under Section 80C (in case of old tax regime). This means that by investing ₹1.5 lakh, you can save up to ₹46,800 in taxes annually (old tax regime only)).
Wealth creation and higher returns
Since ELSS invests in equities, it offers the potential for returns more than regular tax-saving options like PPF or fixed deposits. Historical data shows that ELSS delivered 12% or more average annual returns over the last 10 years. However, past performance does not guarantee future returns. Considering all this, ELSS can seem quite ideal for investors who are seeking growth.
Short lock-in period
Unlike other tax-saving schemes, such as PPF (15 years) or NSC (5 years), ELSS funds have a lock-in period of just 3 years, which makes them relatively flexible.
SIP option available
This is yet another ELSS fund benefit. You can start investing in ELSS through Systematic Investment Plans (SIP), which allows you to contribute in small amounts regularly. Not only does this ensure affordability, but it also helps you benefit from rupee cost averaging.
Diversified portfolio
ELSS funds can invest in a mix of large-cap, mid-cap, and small-cap stocks. This offers you the opportunity to get a diversified portfolio.
Easy to invest and track
Investing in ELSS is generally a straightforward process. Monitoring your funds is also easy, as you can track the performance of your fund online.
Key Features of ELSS Mutual Funds
The primary purpose of the ELSS fund is to help investors in wealth creation while enjoying tax benefits under Section 80C of the Income Tax Act. The ELSS scheme combines the potential of equity investing with tax efficiency, making it a suitable choice for long-term financial planning. Here are the key features of ELSS Mutual Funds:
- Equity-Focused: At least 80% of the ELSS fund portfolio is invested in equities and equity-linked instruments.
- Tax Saving Benefit: Offers tax deduction of up to ₹1.5 lakh per annum under Section 80C of the Income Tax Act, 1961 (under old regime).
- Short Lock-In Period: ELSS have only a 3-year mandatory lock-in period, unlike other tax-savings investment options.
- High Return Potential: ELSS historically delivers higher returns than traditional savings instruments. However, past performance does not guarantee future returns. ELSS returns are market-linked and subject to fluctuations.
- Flexibility of Investment: Investment can be made either in a lump sum or through SIP
- No Maximum Tenure: Although locked for 3 years, one can stay invested beyond that without any upper limit.
- Taxation Benefits: Gains after the lock-in period of three years are considered as long-term capital gains and are tax-free up to ₹1.25 lakhs/year; excess is taxed at 12.5%.
- No Entry or Exit Loads: Most ELSS schemes come with zero entry or exit charges, adding cost-efficiency.
- Diversification: ELSS funds invest across different sectors and market-capitalisation segments such as large-caps, mid-caps, and small-caps—thereby reducing risks.
Who should invest in ELSS?
Ideally, ELSS is suitable for:
First-time investors
ELSS is a starting point if you are new to equity markets but want to explore them while saving taxes.
Long-term planners
It is perfect for young professionals or individuals looking to build wealth for long-term goals like funding a higher education, buying a house, or planning retirement.
Tax savers
ELSS can be considered if you are an individual looking to save taxes while growing your wealth.
Risk-tolerant investors
If you are comfortable with equity market fluctuations.
How to invest in ELSS?
The process of how to invest in ELSS is very easy and simple—choose a trusted fund, decide on a lump sum or SIP, complete the documentation, and start investing online through the platform for wealth creation and tax savings. Here are the easy steps to get started:
Research and compare funds
Try looking for funds with a good performance track record, low expense ratio, and consistent returns over the years. However, it is to be understand that the past performance does not guarantee future returns. ELSS returns are market-linked and subject to fluctuations
Choose an investment mode:
Here, try choosing between a lump sum (investing a one-time amount) or systematically through SIP (investing monthly/ ).
Complete KYC:
Complete the mandatory Know Your Customer (KYC) process accurately that the insurer would do when you buy the policy. You would have to submit the relevant KYC documents for the same. Make sure there are no mistakes, as they will only delay the process.
How to Invest in ELSS:
You can invest via:
Mutual fund companies:
You can directly invest through the official website or app of a mutual fund company.
Brokers or agents:
Reach out to financial advisors or distributors to make informed and guided decisions.
Online platforms:
This is where it gets easy. You can invest through different online investment platforms for hassle-free investing.
Banks:
Many banks offer ELSS funds through their branches.
Monitor its performance:
While ELSS has a lock-in of 3 years, periodically monitoring its performance can help you make better financial decisions.
How to choose the best ELSS fund?
When selecting an ELSS fund, make sure you consider the following factors:
Past performance:
Look for funds with a consistent track record of returns over several market cycles. However, it is to be noted that past performance does not guarantee future returns. ELSS returns are market-linked and subject to fluctuations.
Expense ratio:
Funds that come with lower expense ratios can translate to increase in net returns.
Fund manager expertise:
Always check the fund manager’s experience and track record.
How do ELSS mutual funds work?
An ELSS fund invests 80% of the funds in the stocks of companies across sectors and market capitalisation, including large-cap, mid-cap and small-cap, ensuring sectoral and market-cap diversification. ELSS has a compulsory three-year lock-in period. The objective of ELSS is to help the investor build a well-diversified portfolio which can grow wealth in the long run while saving on taxes. Fund managers carefully choose stocks based on market analysis and thorough research, aiming to deliver better sustainable growth potential and risk-adjusted returns.
ELSS vs Other Tax-Saving Options: A Comparative Guide
Investment in equity and equity-related instruments and their lower lock-in period is what makes ELSS funds different from other tax savings schemes. Here is a comparative table of ELSS vs other tax-saving options:
| Investment option | Lock-in Period | Return Potential | Taxability (Tax laws are subject to change. Please consult your tax advisor for the latest information and eligibility )
|
|---|
Equity‑Linked Savings Scheme
| 3 years
| Variable, potential High returns
| Yes, Investments up to Rs. 1.5 lakh per year is exempted under Section 80C of the Income Tax Act, 1961 and the funds and gains after the lock-in period of three years are considered as long-term capital gains and are tax-free up to ₹1.25 lakhs/year; excess is taxed at 12.5%.
|
Fixed Deposit
| 5 years
| Moderate returns, 4-6%
| For tax-saving FDs (5-year term), investments qualify for Section 80C deduction.
|
Public Provident Fund
| 15 years
| 7-8%
| Contributions up to ₹1.5 lakh per financial year are eligible for deduction under Section 80C.
|
National Savings Certificate
| 5 years
| 7-8%
| Investments up to ₹1.5 lakh per financial year are eligible for deduction under Section 80C.
|
National Pension System
| Up to retirement
| 8-10%
| Contributions up to ₹1.5 lakh qualify under Section 80C, and an additional ₹50,000 is allowed under Section 80CCD(1B), over and above 80C.
|
Kindly note that benefits under Section 80C is available only in the old tax regime.
Things to keep in mind before investing in ELSS
Just knowing what is ELSS is not enough. Here’s what you need to keep in mind before investing in it:
Risk appetite
ELSS is a market-linked product. Although it offers returns, it carries market-risk. Before investing, make sure to understand your comfort with market risks.
Investment horizon
Although the minimum lock-in is 3 years, staying invested for 5 to 7 years can help you get more out of your returns.
Tax implications
While investments are tax-deductible, the returns are taxed as Long-Term Capital Gains (LTCG) at 12.5% for gains exceeding ₹1.25 lakh. However, please note that tax benefits are as per prevailing Income tax laws and subject to change. Please consult your tax consultant about eligibility.
Key Takeaways
- ELSS funds offer the dual benefit of tax-saving under Section 80C and long-term wealth creation.
- An ELSS fund builds a diversified portfolio by investing in large-cap, mid-cap, and small-cap companies.
- Investors can choose flexible modes like SIPs or lump sum based on preference.
- ELSS have a three-year lock-in period, the lowest among tax-saving options.
- With exposure to equity instruments, ELSS funds offer higher growth potential in comparison to traditional savings instruments.
Bottom line
Summing up, ELSS is an option for anyone looking to save taxes and grow wealth. With their short lock-in period, return potential, and flexibility, ELSS indeed stands out as one of the best tax-saving options in India. However, it also comes with its own set of risks. Invest for the long term to make the most of this opportunity.
FAQs
What is the lock-in period for ELSS mutual funds?
The lock-in period for ELSS mutual funds is 3 years, shortest amongst other tax saving investments under Section 80C of the Income Tax Act, 1961.
Can I withdraw the entire amount from ELSS after 3 years?
Yes, you can withdraw the entire amount from the ELSS fund after 3 years if you invest through a lump sum, and the entire corpus completes the three-year lock-in on the same date. However, if you invest through SIPs, each SIP installment in ELSS has its own 3-year lock-in period. Withdrawals are permitted only after the completion of the lock-in for each installment.
Is it possible to redeem ELSS mutual funds at any time?
No, ELSS mutual funds can be redeemed only after the three-year lock-in period from the date of investment.
How are ELSS returns calculated?
ELSS returns are calculated based on the Net Asset Value (NAV) movement of the portfolio of the fund, which reflects changes in performance of the invested stocks across different sectors and market capitalisations. You can use the ELSS calculator on the chosen fund website and estimate the amount of ELSS returns.
How does ELSS differ from other tax-saving investment options?
ELSS differs from other tax-saving investment options by investing in stocks, unlike PPF or fixed deposits. It combines tax benefits with equity-linked wealth creation, offering higher return potential and a three-year lock-in, unlike other traditional tax-saving tools such as PPF or fixed deposits.
