All You Need To Know About ELSS: A Tax Saving Tool

What is ELSS?

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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Taxation

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

Risk and Return

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.

How to Know if the ELSS Funds are Performing?

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.

Features of ELSS:

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?

Comparison of ELSS with other Section 80C instruments

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

Advantages of ELSS

ELSS has various advantages, below mentioned are a few of them:

• ELSS funds are managed by a professional.
• All Asset Management Companies (AMCs) are recognized by SEBI and hence it is safe to invest in ELSS.
• ELSS returns have the potential of being inflation beating.
• You have an option of investing in SIPs, this helps in inculcating financial discipline.
• Tax deductions of up to Rs 1,50,000 a year under Section 80C of the Income Tax Act, 1961.
• Lowest lock-in period among all Section 80C instruments.

Disadvantages of ELSS

• Lock-in period: ELSS funds come with a lock-in period of 3 years and you are not allowed to make premature withdrawals. Hence, you cannot rely on this investment to cover emergencies.
• Market risk: ELSS funds invest in stock market. Returns are not guaranteed and depend on how the stock markets play.
• Investing in ELSS has some risk. It is advisable that only those investors willing to bear some risk invest in ELSS. Stay invested for the long term.
• Tax deduction is capped at Rs 1,50,000 a year under Section 80C.

Top ELSS funds 2019

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.

Conclusion

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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