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Equity Linked Savings Scheme

9 March 2020   

Tax saving is one important part of our financial career, managing tax efficiently is an art, if you can expertise that most of your financial issues could be resolved. When it comes to saving taxes most of us wait till the month of March because we continue our habits to push everything to the last day of submission like our school time assignment. Most of us end of in the paws of wrong products just because we want to get over with this.

This specially happens to the investor who have just started working and may not have much knowledge about investment or tax saving.

So before taking any decision further, please review one of the most popular tax saving option i.e. tax saving mutual funds.

ELSS or Equity Linked Savings Schemes are Mutual Fund Investment schemes that help you save income tax. That’s why they are also known as tax-saving funds. The Income Tax Act, under section 80c, allows taxpayers to invest up to INR 1.5 lakh in specific securities and claim it as a deduction from their taxable income. One of the approved securities is ELSS– others include PPF, postal savings like NSC, tax-saving FDs, NPS, etc.

Features of ELSS Mutual Funds

1. ELSS funds invest a large percentage of their portfolio in equity.

2. They have a compulsory lock-in period of 3 years, which is the shortest amongst all tax saving instruments.

3. You enjoy the dual benefits of capital appreciation from investments in equity along with tax-saving instruments.

4. You can opt for dividend pay-outs if you wish to receive regular income or go with the growth option for capital appreciation.

5. ELSS Mutual Funds have no entry or exit load.

6. Good ELSS Funds generate returns in the range of 10-12 per cent in the long run, among the highest in the tax-saving category of instruments. However, ELSS also comes with some risk, inherent in equity investments

How to invest in ELSS

You can invest in ELSS the same way that you invest in any Mutual Fund. The easiest way is through an Online Investment Services Account. You can invest either as a lump sum or via the SIP (systematic investment plan) route.
SIP ensures regularity and discipline and reduces the risk to capital.

You can invest as little as INR 500 in an ELSS fund.

While you can claim tax benefit only up to INR 1.5 lakh, you are free to invest as much as you like.

Advantages of ELSS Funds:

1. Just 3 years of lock in.

2. The portfolio in which the will be invested is transparently available to all the investors.

3. Once the invested money completes 3 years of lock in period, you can with draw 100% of it.

4. ELSS provides you flexibility to invest via SIP or lump sum mode.

5. The returns regenerated by ELSS funds are comparatively better than in competitor products.

6. Fund manager is the expert who manages your money, even if you are new to investment but want to save tax, ELSS could be a good option.

7. There is no maximum limit for investment in ELSS even once you tax limit is exhausted , one can still invest in ELSS only thing is taxes can be saved up to Rs. 46,800*/-.

Disadvantages of ELSS Funds:

1. ELSS is equity linked investment; there is no way one can avoid exposure towards equity in so it’s not suitable for conservative investors.

2. The money which you received after 3 years of lock in period will be taxable as per Long term capital gain tax.

3. The returns are not guaranteed, any investment in mutual fund doesn’t guarantee returns.

4. NRI from Canada and US can’t invest in mutual funds.


1. How much tax can I save by investing in ELSS?

Ans: In the highest tax bracket of 30%, you can save a maximum of up to Rs. 45,000/- as taxes by investing a maximum of Rs.1.5 lac under Section 80C of the Income Tax Act, in the year of investment.

2. What are the other benefits of investing in ELSS?

Ans: While tax savings is just one avenue of ELSS funds, they also offer you the following benefits:

»  It gives an opportunity to compound your money by investing in the equity market.

»  The returns from ELSS funds are Long-term capital gains and hence are tax free.

»  The lock-in period is only 3 years.

»  Investing in ELSS funds through SIP helps in      

•  Rupee Cost Averaging      

•  Reaping benefits of power of compounding in long run.   

•  Planning tax in the most efficient way.  

   •  save every month reducing pressure of investing huge lumpsome at the end of the financial year.

3.Is it recommended to make lumpsum investments in ELSS funds or do a SIP?

Ans: It is strongly recommend that you plan your tax savings through SIP mode rather than investing lumpsum, usually in the last quarter of the financial year. SIP gives you the advantage of rupee cost averaging while reducing volatility over the long term period. It also reduces the stress of arranging huge sum at one go to save tax. A number of investors find this difficult and end up saving less than what they are required to save. A discipline approach through SIP will make sure you do all the tax savings that you are supposed to do.

4. Should my first mutual fund investment be in ELSS?

Ans: Yes, until you consume your limit of saving upto Rs. 1.5 lac rupees under section 80C, your investments in mutual funds must go in a ELSS fund through SIP mode.

5. Are earnings from ELSS funds taxed?

Ans: NO, earnings from ELSS funds after a lock-in period of 3 years are TAX FREE.

Comparison of ELSS with other savings investment options

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