An ELSS or Equity Linked Savings Scheme is just like any other mutual fund scheme. It invests primarily in equity or equity related instruments. ELSS are usually termed as tax saving schemes since they offer an exemption of upto INR 1,50,000. The deduction comes under section 80C of Chapter VI-A of the Income Tax Act.
ELSS funds invest in stocks of listed companies. The investment takes place in specific proportions according to the investment objective of the fund. The stocks are chosen from across market capitalisation (Large, Mid and Small Caps) and various industry sectors. These funds aim to maximise capital over the long run.
ELSS gives an opportunity for investors who want to reduce their tax liability and grow their capital at the same time. Following are the Features and benefits of investing in ELSS:
Features and benefits of ELSS
1. Tax Benefit
Investments upto INR 1,50,000 in ELSS are eligible for deduction u/s 80C. Also, any dividend or long term capital gain earned by the investor is exempted from income tax up to a limit. Gains over INR 1 lakh attract a rate of only 10%. Lower tax rates and higher returns are a huge advantage of investing in ELSS.
For example-
- Yash has a taxable income of INR 12 lakh. This puts him in the 30% tax bracket. He decides to invest INR 1.5 lakh in an ELSS fund. This reduces his taxable income to INR 10.5 lakh.
- Yash earns a capital gain of INR 1,50,000 on redemption of ELSS. This attracts a 10% tax on the INR 50,000 while the remaining INR 1 lakh remains exempt. Tax payable will be INR 5,000 (plus cess).
Note: Deduction under section 80C can only be claimed if you opt for the Old Tax Regime. Read more over here.
2. Lowest lock-in period
ELSS funds have a minimum lock-in period of 3 years. The investor has an obligation to invest for a minimum of 3 years. This inculcates a good habit to stay invested for a long period of time. ELSS mutual funds have the shortest lock-in period among all other tax-saving instruments. The investor can also allow continuous growth of the fund beyond these 3 years.
3. Saving habit
ELSS allows you to invest through a monthly SIP or Systematic Investment Plan. You can invest as low as INR 500 per month. This nurtures a continuous habit of investing. The returns of the SIP amounts will be generated every month after the lock-in period of 3 years.
4. High returns
ELSS is essentially an equity scheme, it has the potential to deliver exponential returns in the long run. Moreover, investment in ELSS has the potential to deliver significantly higher returns compared to traditional tax saving instruments.
ELSS has the lowest lock-in period amongst all other tax saving instruments. To add on, where savings can give about 8% of returns, investing in equity may produce higher returns in a favorable situation in the stock market. This creates an opportunity to invest as well as save at the same time.
5. Diversification
Investment portfolio of ELSS consists of balanced allocation to different asset classes such as equity and debt securities. Besides this, numerous funds diversify within the equity category as well, allocating the assets to large cap, mid cap, small cap equity stocks.
Through ELSS, one can easily diversify their overall investment portfolio and effectively mitigate market risk.
Ways to Invest in ELSS Funds:
1. Online and offline
You can invest in ELSS online seamlessly through online platforms or directly through the websites of the Asset Management Companies (AMCs), offering the fund.
This conventional mode of investment requires an investor to fill a form and submit it at the nearby branch of the fund house, or invest through a broker.
2. Growth option
When you go for the growth option, you will not receive benefits in the form of dividends. You will get the gains only at the time of redemption. This helps to appreciate the total NAV. This in turn multiplies the profits. However, one should keep in mind- the returns are subject to market risk.
3. Dividend option
Under this option, an investor gets benefits from time to time in the form of dividends, which are completely tax-free. The dividend is declared only when there are excessive profits, over and above.
4. Dividend Reinvestment option
This is an option under which an investor reinvests the dividends received to add to the NAV (Net Asset Value). This works well, particularly when the market is seeing an upward trend and is likely to continue the same way.
Read more about ELSS over here.
Who Can Invest in ELSS Mutual Funds:
- ELSS might form a good investment option for first time investors. In addition to tax benefits they might get a flavour of equity investing and mutual funds.
- This scheme is suitable for investors with a long term investment planning (preferably more than 3 years). The fund has a minimum lock-in period of 3 years. Moreover, it has been observed that equity securities perform well in the long run, and this mandatory lock-in period ensures that the investors remain invested.
- As the underlying assets mostly comprise equity securities, which are quite volatile, it is important that the investor has a high risk appetite to invest in ELSS and a long term wealth creation goal.
Blog: Tax Hack 103: Tax Savings Investments
Comparison with Other 80C Investments
| Name of Instrument | Lock-in Period | Approx Returns | Tax on Returns |
| ELSS | 3 years | 12-14% | Taxed at 10% on long term capital gains above INR 1 lakh |
| Tax-saving FD | 5 years | 6-7% | Yes |
| National Saving Certificate (NSC) | 5 years | 7-8% | Yes |
| Public Provident Fund | 15 years (premature withdrawals allowed from 7th year) | 7-8% | Returns are exempt from tax |
| National Pension Scheme (NPS) | After the age of 60 | 8-10% | Partially Taxable |
Although the tax benefits of ELSS are huge and there is an additional benefit of wealth creation, the risk associated with ELSS is high and should not be overlooked.
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Hey @sushil_verma
There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.
Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.
For eg,
Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.
The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).
Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).
As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.
Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback.
No issues. You’re welcome!