Equity Linked Savings Scheme (ELSS) are tax saving mutual funds, which enjoy tax benefits under Section 80C of the Income Tax Act, 1961. ELSS funds have a lock-in period of 3 years and are eligible for tax deductions, up to Rs 1.5 Lakhs a year. ELSS invests most of your money in stocks. You can invest either a lump sum or via SIPs in mutual funds.
ELSS is available in both dividend and the growth option. Under growth option, returns are reinvested and are received at the time of redemption along with the capital invested. Under dividend option, you are paid out dividends as and when they are declared. This is even during the lock-in period.
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You can invest in ELSS to save taxes under Section 80C. You can claim a deduction of maximum of Rs 1.5 Lakhs a year on amount invested in ELSS. You enjoy tax exemption on long term capital gains of up to Rs 1 Lakh on staying invested for more than a year. Capital gains which exceed Rs 1 Lakh are taxed at 10%.
SEE ALSO: Advantages and Disadvantages of ELSS
ELSS is apt for investors who are willing to bear risk. Investing in ELSS is much safer than investing in small and mid cap funds as volatility is much lower. ELSS offer higher returns than debt funds, but bear more risk.
Start with checking the track record of the ELSS fund. ELSS funds with a track record of more than 5 years can be considered relatively safer than new funds. Check if the returns generated on the funds are due to the decisions made by the fund manager and not sheer luck.
You must remember that investing in ELSS is risky. Return on the investment is not guaranteed, and totally depends on the fund’s performance. ELSS is relatively safe over the long term.
Option of Investing in SIPs: You have the option of investing in SIPs or lump sum, as per comfort levels.
Shortest Lock-in Period: ELSS funds have the shortest lock-in among the popular Section 80C investments.
Financial Discipline and High Returns: Apart from offering tax benefits, ELSS forces you to stay invested across the lock-in period, thereby helping you inculcate financial discipline and enjoy better returns.
No Investment Limit: The minimum investment is Rs 500, while there is no upper limit. However, tax deductions are restricted to Rs 1,50,000 a year under Section 80C of the Income Tax Act, 1961.
SEE ALSO: What is an Equity Linked Saving Scheme?
The table below compares various Section 80C instruments with ELSS:
Instrument |
Returns |
Lock-in Period |
Tax on Returns |
5-Year Bank FD |
6 - 7% |
60 months |
Yes |
PPF (Public Provident Fund) |
8% |
180 months |
No |
NSC (National Savings Certificate) |
8% compounded annually |
60 months |
Yes |
NPS(National Pension System) |
8 - 10% |
Till Retirement |
Partially Taxable |
Equity Linked Savings Scheme (ELSS) |
8 - 12% |
36 months |
Partially Taxable |
ELSS has various advantages, below mentioned are a few of them:
The table below shows the top ELSS funds based on returns generated:
Top ELSS Funds |
3 years |
5 years |
Reliance Tax Saver Fund |
6.19% |
17.98% |
DSP BlackRock Tax Saver Fund |
11.46% |
17.99% |
Axis Long Term Equity Fund |
11.86% |
20.34% |
Aditya Birla Sun Life Tax Relief 96 |
12.22% |
19.74% |
SBI Magnum Taxgain Scheme |
7.06% |
14.59% |
ICICI Prudential Long Term Equity Fund |
9.07% |
16.15% |
Disclaimer: The funds are listed based solely on the returns generated. This is not a recommendation for investors in any way. We recommend you to do your own research or consult a financial advisor to decide on investing in ELSS.
Investing in ELSS is a good tax saving option. ELSS comes with twin benefits of capital appreciation and tax deductions. It offers tax deductions as per Section 80C. Returns are not guaranteed as it depends on how the stock markets play.
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