If you are preparing to invest in Mutual Fund, then you should know about ELSS FUND. In this post we will understand what is ELSS FUND? And how to invest in ELSS?

Investing in ELSS Mutual Funds comes with the twin benefits of tax deduction and wealth accumulation over time. ELSS Mutual Funds have a lock-in period of just three years, which is the lowest among all tax-saving investments and has the potential to give the highest returns among 80C options.

What is ELSS Fund?

Equity-linked savings scheme or ELSS Fund is the only mutual fund that is eligible for tax deduction under the provisions of Section 80C of the Income Tax Act, 1961. You can claim tax exemption and save up to Rs.1,50,000. You can save tax up to Rs 46,800 annually by investing in ELSS mutual funds.

The asset allocation of ELSS mutual funds is done mostly (65% of the portfolio) towards listed stocks like equity and equity-linked securities. They may also invest in certain fixed income securities. These funds come with a lock-in period of just three years, which is the lowest among all section 80C investments.

Equity Linked Savings Scheme (ELSS) There is a special category of Equity Mutual Funds with a lock-in period of 3 years. In other words, it acts like an equity fund, wherein the fund manager manages a portfolio of equities. The only difference is, once you invest in ELSS, you cannot make withdrawals for a period of 3 years. After completion of 3 years from the date of purchase, the lock-in is released and you are free to sell these shares.

The main reason why many mutual fund investors find this ELSS attractive is the special discounts available to investors on ELSS investments. ELSS investments are eligible for tax exemption to the extent of Rs 1.50 lakh per annum under Section 80C of the Income Tax Act. Every year, you can invest this amount in ELSS funds and get tax exemption. However, it needs to be remembered that this discount is an overall discount. Apart from ELSS, Section 80C also provides similar exemption for other investments like PPF, LIC Premium, Contributory Provident Fund, ULIPs, home loan principal, tuition fees etc. The limit of Rs 1.50 lakh is the umbrella limit for all these investments including your ELSS contributions.

What are the features of ELSS Fund?

Following are the salient features of ELSS Mutual Funds:

  • They offer tax deduction of up to Rs 1,50,000 annually under the section 80C provision
  • ELSS funds come with a lock-in period of three years, and there is no provision for premature exit
  • You can invest any amount in ELSS, there is no upper limit, while the minimum investable amount varies from fund house to fund house
  • ELSS Fund is the only tax-saving investment that has the potential to deliver returns that beat inflation
  • Investing in ELSS funds gives you the twin benefits of tax deduction and wealth creation
  • The portfolio of ELSS funds consists mostly of equities, while they also have some exposure to fixed-income securities.

What are the tax benefits offered by ELSS funds?

ELSS Mutual Funds offer tax deduction of up to Rs 1,50,000 per year under the provisions of Section 80C of the Income Tax Act, 1961. This helps you save up to Rs 46,800 per year in taxes. However, note that your investment is locked-in for three years from the date of investment.

What are the things to be kept in mind before investing in ELSS?

You need to consider the following factors while investing in ELSS Mutual Funds:

  • investment horizon: You must have an investment horizon of more than five years to consider investing in ELSS funds. The equity exposure of ELSS funds requires you to have a longer investment horizon to cushion the volatility in the market.
  • ReturnYou need to understand that ELSS funds do not offer guaranteed returns as they completely depend on the performance of the underlying securities. However, having an investment horizon of more than 5 years can yield higher returns than any other tax-saving investment option.
  • lock-in period: ELSS Mutual Funds come with a lock-in period of three years. Your investments are essentially locked-in for three years from the date of investment, and you cannot redeem your holdings till the completion of this period.

How tax benefits enhance your returns on ELSS

If you take a normal equity fund and compare it with an ELSS fund, the difference in returns will be clear to you. Let us understand this difference from the below table

equity fund Amount ELSS Fund Amount
Purchase NAV Rs.100 Purchase NAV Rs.100
Sale NAV after 3 years Rs.158 Sale NAV after 3 years Rs.158
Total Units Held 1,000 units Total Units Held 1,000 units
Capital Gains Rs.58,000 Capital Gains Rs.58,000
CAGR Returns (%) 16.48% Tax shield u/s 80C 30.9%
Exempted purchase price Rs.30,900
Effective Investment Rs.69,100
Effective Capital Gains Rs.88,900
Effective CAGR (%) 31.75%

You must be wondering that with the same fund and same NAV movement, how ELSS generated such a huge difference in annualized CAGR returns.

It works like this. When you invest Rs 100, you are getting Rs 30.90 back as tax exemption in the same year. This means you are effectively investing only Rs 69.10. But that investment still grows to Rs 158 at the end of 3 years.

Hence, your effective gain is more than the amount of tax shield you get from ELSS investment. This is what you get from ELSS.

In this case, the annual gain on the equity fund is less than Rs 1 lakh, so long-term capital gains will not be applicable. We are also assuming that the person does not have any other section 80C investment, which is not normally the case. In that case, your tax shield will reduce proportionately.

List of 10 Best ELSS Funds 2021

Best ELSS Mutual Fund to invest in 2021

Fund Name Returns (%)
1 year 3 years 5 years 7 years 10 years
Axis Long Term Equity 46.34 11.58 14.71 17.54
Mirae Asset Tax Saver 63.49 14.91 19.86 ,
Invesco India Tax Plan 50.14 9.99 13.69 15.98
Aditya Birla Sun Life Tax Relief 96 39.62 5.38 11.68 15.35
DSP Tax Saver 58.77 11.57 14.74 16.72
Kotak Tax Saver 55.06 12.29 14.46 16.31
ICICI Prudential Long Term Equity 53.39 9.55 12.16 13.68
Motilal Oswal Long Term Equity 47.74 5.94 14.45 ,
Tata India Tax Savings 50.80 8.27 13.11 15.89
Nippon India Tax Saver 53.86 0.38 6.66 11.28
benchmark(S&P BSE 500 TRI) 60.58 10.36 14.23 13.90
ELSS category average 53.36 8.14 12.70 14.23
(Data as on April 20, 2021: Source: Value Research)

Tips for Investing in ELSS Funds

  • Compare past performance over 3-, 5- and 7-year periods while making fund selections. While no one guarantees past performance in the future, a comparison of their past returns can help show how they coped with different market conditions.
  • Do not wait for the last quarter or month of the financial year to invest in ELSS. Higher valuations in the equity market at that time, if any, will cost you more for the ELSS fund units. Instead, opt for the SIP option to spread your investments over the years and take advantage of cost averaging during market correction, if any, in the interim.
  • Do not select the dividend option. Instead, choose the growth option to benefit from the power of compounding. Dividends are also taxable to the investors as per their tax slab.
  • Opt for Direct Plan for higher returns. Since direct plans have a lower expense ratio as compared to growth plans, the savings generated are invested in the fund itself thereby yielding higher returns in the long run.

frequently Asked question

Is ELSS taxable after 3 years?

Long-term capital gains on ELSS are tax-free up to Rs 1 lakh, and dividends received are tax-free for investors. You can continue investing in this scheme even after completion of the lock-in period of three years

Which is better ELSS or PPF?

However, over the long term, PPF offers much lower returns than ELSS. PPF is more beneficial in terms of tax benefits and capital protection; However, ELSS is a viable option for higher and market linked returns. Though both are beneficial in terms of tax savings, but only PPF offers tax-free returns.

Are ELSS Funds Safe?

ELSS funds are essentially diversified equity funds and carry the same risk as equity funds as they invest in both the equity markets. But apart from the inherent equity risk component, ELSS funds have a lock-in period of three years after investment, during which money cannot be withdrawn from the fund.

Are ELSS Funds Beneficial?

ELSS have more potential than PPF, ULIP or any other tax-saving option to generate higher returns, which makes them a good bet for long-term investments. Even with tax on LTCG, the post tax returns from ELSS would be more attractive than PPF or ULIP.

Which is better SIP or ELSS?

The amount you plan to invest in ELSS can be deducted from your salary before computing taxes. No other category of mutual funds offers tax benefits. This is not the difference between ELSS and SIP. You can invest in ELSS mutual funds through SIP or lumpsum mode and still you will be able to save tax

Can I exit ELSS before 3 years?

Can ELSS be withdrawn within 3 years? The simple answer to this question is no. ELSS investment does not provide an option to withdraw the investment amount before the end of the lock-in period of 3 years. In ELSS, investors are given fund units in exchange for their invested amount.

How are ELSS returns calculated?

For example: If you plan to invest Rs 5000 per month for 12 months, expecting a return of 15%, the ELSS SIP calculator will be able to calculate the maturity value of your SIP. Your cumulative investment will be Rs.60,000 (INR 5000*12 months). The maturity value of this SIP will be Rs 65,106.

How do I deposit in ELSS?

You can invest in ELSS just like you do in any mutual fund. The easiest way is through an online investment service account. You can invest either in lump sum or through SIP (Systematic Investment Plan) route.

What is ELSS SIP?

An Equity Linked Savings Scheme or ELSS is a mutual fund category that offers tax exemption under section 80C of the Income Tax Act, 1961. You can claim a tax deduction of up to Rs 1.5 lakh annually by investing in ELSS. ELSS Mutual Funds have the potential to offer the highest returns among all Section 80C investments.
A Systematic Investment Plan or SIP is the most popular way to invest in Mutual Funds. Through a SIP, you compound your investment over time as you invest a small amount at regular intervals. Your SIP frequency can be weekly, monthly, quarterly or bi-annually as per your convenience.

How to open ELSS account?

To invest in ELSS, you need to open an investment account with the fund house of your choice. Opening an investment account is free. Thereafter, you will need to undergo KYC verification, for which you will need to provide a photograph, PAN and valid proof of address in the prescribed format. Once you do that, you can select the tax saving or ELSS mutual fund under the fund house and buy its units.

See also  What are Mutual Funds? What is Mutual Funds?


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