Home > Topics > Mutual Fund Management > Tax Saving Mutual Funds – ELSS
← PreviousNext →

Tax Saving Mutual Funds – ELSS

Introduction

Equity Linked Savings Scheme (ELSS) is a specific category of mutual funds that offers a unique dual benefit: capital appreciation from equity investments and tax saving under Section 80C of the Income Tax Act. It has emerged as one of the most popular tax-saving instruments in India due to its low lock-in period and high return potential.

Key Features of ELSS

1. Tax Deduction

Investments in ELSS qualify for a deduction of up to ₹1.5 lakh from taxable income under Section 80C.

  • Example: If you earn ₹10 lakh and invest ₹1.5 lakh in ELSS, you pay tax only on ₹8.5 lakh.

2. Lock-in Period

ELSS has a mandatory lock-in period of 3 years from the date of allotment.

  • What it means: You cannot redeem or sell your units before 3 years are completed.
  • Comparison: This is the shortest lock-in among all Section 80C options (PPF has 15 years, tax-saving FD has 5 years).

3. Portfolio Composition

As the name "Equity Linked" suggests, these funds must invest at least 80% of their corpus in equity and equity-related instruments.

  • Risk: High (similar to other diversified equity funds).
  • Return Potential: High (market-linked).

4. SIP in ELSS

Investors can start a Systematic Investment Plan (SIP) in ELSS.

  • Crucial Rule: Every single SIP installment has its own separate 3-year lock-in.
  • Example:
    • SIP of ₹5,000 on Jan 1, 2023 -> Unlocks on Jan 1, 2026.
    • SIP of ₹5,000 on Feb 1, 2023 -> Unlocks on Feb 1, 2026.

Comparison with Other Section 80C Instruments

Loading comparison…

Why Choose ELSS?

  1. Wealth Creation: It is the only tax-saving option with the potential to beat inflation significantly over the long term (12-15% CAGR historical average).
  2. Liquidity: Offers the quickest access to money (after just 3 years) compared to PPF or FDs.
  3. Transparency: Daily NAV disclosure allows investors to track performance.
  4. Flexibility: No mandatory yearly contribution (unlike PPF). You can invest one year and skip the next.

Taxation of ELSS Returns

When you redeem ELSS units after the 3-year lock-in:

  • The gains are treated as Long Term Capital Gains (LTCG).
  • Exemption: Gains up to ₹1 Lakh in a financial year are tax-free.
  • Tax: Gains exceeding ₹1 Lakh are taxed at 10%.

Case Study: ELSS vs PPF

Loading case study…

Summary

  • ELSS: Tax Saver Fund + Wealth Creator.
  • Section 80C: Deduction up to ₹1.5 Lakh.
  • Lock-in: 3 Years (Lowest).
  • Portfolio: >80% Equity.
  • Taxation: LTCG 10% on gains > ₹1 Lakh.

Quiz Time! 🎯

Loading quiz…

← PreviousNext →