All about ELSS | Equity Linked Savings Scheme | Tax Saving Mutual Funds

What is ELSS (Equity Linked Savings Scheme)?

ELSS is a type of diversified equity mutual fund where most of the corpus is invested in equity and equity-related products. ELSS funds have a lock-in period of three years. The investment made in ELSS fund qualifies for tax exemption under Section 80C of the Income Tax Act.

They are open-ended and the investor can subscribe to the fund at any day. Since ELSS (Equity Linked Savings Scheme) is an equity-based fund, the returns from these funds reflect the returns from equity markets.

What are the tax benefits of investing in ELSS funds?

Investment of up to Rs.1.5 lakh made in these funds qualifies for tax deduction under Section 80C every year.

Why are the other benefits of investing in ELSS funds?

ELSS fund don't just help you save tax but also give you an opportunity to compound your money from the potential of the Indian equity market. Moreover, compared to other tax saving instruments like PPF, NSC, and Bank FDs, the lock-in period of an Equity Linked Savings Scheme is much lower. They have has a lock-in period of 3 years from the date of investment.

You can opt for the dividend option and get some gains during the lock-in period. Also investing through SIP helps in Rupee Cost Averaging. There is no maximum limit to invest, but you can claim a tax deduction up to Rs.1.5 lakh only.

Who can invest in ELSS funds?

Individuals and HUFs are eligible to invest. NRIs can also invest in these funds. However, most AMCs do not allow NRI’s from Canada and USA to invest in India.

For whom the ELSS is suitable?

ELSS is suitable for those types of investors who are not risk averse and want to invest in tax saving options. ELSS is a good option to have for youngsters who have just started their career. ELSS is also suitable for those investors who have the ability to take the risk as well as the flexible long time horizon for returns that beat inflation.

How to invest in ELSS funds?

KYC compliance is compulsory for investing in mutual funds in India. Once you fulfill KYC compliance you can start investing. There are offline and online options to invest. You can invest online through AMC (Asset Management Company) websites, brokers’ platforms or independent websites. You can invest in a lump sum or via SIP.

What is the investment limit in ELSS fund?

You can start investing with a minimum amount of Rs 500. There is no upper limit on investment. However, you can avail a maximum deduction of Rs. 1.5 lakh under Section 80C of the Income Tax Act in a financial year.

What is the investment tenure in ELSS fund?

The investment tenure in Equity Linked Savings Scheme is 3 years from the date of investment. This means you can exit from ELSS fund by selling it after 3 years. However, you can stay invested in ELSS fund as long as you want, with or without further contributions.

Note that if you are investing via SIP route, then every installment will be locked in for 3 years from the respective investment date.

What are the plan options available?

These funds have two plan options:

1. Growth option: In this option, you will get a lump sum on the completion of 3 years. This plan option is recommended for long-term wealth creation.

2. Dividend option: Under this option, you will get dividend whenever the dividend is declared by the fund even during the lock-in period. The dividend received is also tax-free.

Which are the best ELSS funds?

The best performing ELSS funds are:

1. Axis Long Term Equity Fund

2. Aditya Birla Sun Life Tax Relief 96

3. Invesco India Tax Plan

4. ICICI Prudential Long term Equity Fund (Tax Saving)

5. DSP Tax Saver Fund

You may invest in these ELSS schemes via SIPs but keep an investment horizon of five years or more in mind.
How are the above-mentioned ELSS schemes performing?

Scheme Name	Returns in Percentage*				AUM (Rs Crores)	Crisil Rank (Sep 30, 2018)	Value Research Rating (Out of 5)
	1 Year	3 Years	5 Years	10 Years
Axis Long Term Equity Fund	1.7	11.69	19.78	NA	17626	2	5
Aditya Birla Sun Life Tax Relief 96	-5.44	12.14	18.92	18.49	6984	1	5
Invesco India Tax Plan	-2.24	11.6	17.6	19.09	687	1	4
ICICI Prudential Long Term Equity Fund (Tax Saving)	-0.18	9.66	15.71	19.64	5486	2	3
DSP Tax Saver Fund	-8.63	11.78	17.24	18.19	4567	3	4
*As on 4/1/2019  Data Source: Value Research Online

Is premature redemption is allowed?

ELSS is an equity fund and comes with 3 years lock-in period. Therefore, you are not allowed to redeem before completion of 3 years. You will necessarily have to remain invested for 3 years.

What are the advantages of ELSS fund over NSC and PPF?

ELSS fund has a short lock-in period compared to NSC and PPF.   

Since ELSS is an equity-based fund, the earning potential is high. If you choose for dividend payout option, you can get some gains during this period. You can invest via SIP route.

What are the disadvantages of ELSS fund over NSC and PPF?

Since ELSS is an equity-based fund, the risk factor is very high compared to NSC and PPF.

Is investment in ELSS funds risky?

ELSS fund comes with equity-related risk as they invest in the stock markets. They do not guarantee the returns. However, the best performing funds generated good returns post inflation.

How to check ELSS funds investments?

You can check your ELSS funds investments in the monthly/quarterly statements which are sent by the AMC to every investor. All the AMCs provide online facility to investors, which allow a hassle free view of the investments.

Also read: Benefits of SIP | Advantages of SIP

Also read: How to start a SIP?

Also read: 7 Investments for tax free income in India

Also read: What is NPS (National Pension System)?

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