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Equity Linked Saving Scheme or ELSS Funds Meaning & Benefits

Imagine an ideal scenario where you may get reasonable returns on your investment and reduce your tax outgo at the same time. Luckily, such an ideal scenario exists in the real world thanks to a unique investment product known as the Equity Linked Saving Scheme also known as ELSS.

What are ELSS funds

An Equity Linked Saving Scheme (ELSS) is an open-ended equity mutual fund that invests primarily in equities and equity-related products. They are a special category among mutual funds that qualify for tax deductions under Section 80C of the Income Tax Act, 1961. As a result, they are popularly known as tax saving mutual funds.

Benefits of Investing in ELSS Mutual Funds?

ELSS mutual funds provide the opportunity to earn reasonable returns and save tax. These funds invest at least 80% of the scheme’s assets in equities. So, the returns you could earn on them are directly linked to the stock market’s performance. This can be a suitable option if you want to invest for long-term goals such as creating a retirement corpus or buying a new house.

You can avail a tax deduction on investments up to Rs. 1.5 lakh every year. These funds also have a mandatory lock-in period of three years. This is one of the shortest lock-in period among all tax-saving investment avenues available. All these benefits make ELSS funds a popular investment option among investors.

What is the best time to invest in ELSS?

Many investors invest in Equity Linked Saving Scheme funds at the end of the financial year to save tax. This may not be considered as a good strategy. Tax saving is definitely an essential consideration for investing in these funds. But it must be the primary reason to consider investing in them.

The best way to maximize benefits on such funds is to invest with a long-term approach. So, identify your investment goals at the beginning of the year and invest accordingly through Systematic Investment Plans (SIPs). Investing steadily all year round can help reduce your exposure to market volatility and build wealth over time.

Features of Equity Linked Saving Scheme (ELSS funds)

Some of its popular features include:

  1. A brief lock-in period
    Popular tax-saving products such as the Public Provident Fund (PPF) or tax-saving Fixed Deposits (FDs) come with extended lock-in periods. For instance, PPF has a lock-in period of 15 years, while tax-saving FDs have a lock-in period of five years. In comparison, ELSS funds have the shorter lock-in period of just three years. This can give you the option of withdrawing your funds at an earlier date in the event of any pressing financial goals.
  2. Inflation-beating returns
    Equity Linked Saving Scheme funds invest predominantly in the stock market. Thus, they have the potential to earn higher yields compared to other traditional tax-saving options
  3. Tax treatment
    You can save tax under Section 80C on investments up to Rs. 1.5 lakh every year. Long Term Capital Gains (LTCG) up to Rs. 1 lakh are exempt from tax. But if your returns exceed Rs. 1 lakh during a year, you are liable to pay LTCG tax of 10% on your returns. Despite this, ELSS remains a popular tax-saving investment avenue among Indian investors.

Equity Linked Saving Schemes vs. other tax saving investments

Several tax-saving investment avenues are available today. This includes the Public Provident Fund (PPF), Tax-Saving Fixed Deposits (FDs), National Pension Scheme  (NPS) and National Savings Certificate (NSC) among others.

Here’s a comparison between ELSS and the other tax-saving instruments to highlight why the Equity Linked Saving Scheme can be one of the best tax saving option.

Lock-in period Investment Risk
ELSS 3 years High
PPF 15 years Low
Fixed Deposits 5 years Low
NPS Till retirement Moderate
NSC 5 years Low

ELSS funds not only have relatively the lowest lock-in period but also have the potential to earn reasonable returns. However, they come with higher exposure to risk. But this can be mitigated by investing with a long-term approach. This way, you spread your risk over a longer tenure and benefit from the potential to earn better yields.

You can invest through SIPs, unlike avenues like FDs, wherein, you have to invest compulsorily through a lump sum. You can begin your investment journey through the SIP route with just Rs. 500 per month. When you invest in ELSS through a SIP, you stand a chance to  earn reasonable returns and achieve investment discipline.

FAQs (Frequently Asked Questions)

  1. What is a lock-in period?
    A lock-in period is the time duration during which you must remain invested in the fund. You cannot withdraw your investment during this period. In the case of Equity Linked Saving Scheme, the lock-in period is for three years.
  2. What is the maximum tax benefit you can avail every year?
    You can avail a tax benefit on a maximum investment of Rs. 1.5 lakh in ELSS every year. This tax deduction is applicable under Section 80C of the Income Tax Act, 1961.
  3. How does a SIP work?
    A Systematic Investment Plan (SIP) in ELSS funds works similar to a regular SIP. The only difference here is that your investments need to be locked in for three years. Also, you can calculate your returns on investments by using SIP calculator online.
  4. Who should invest in an Equity Linked Saving Scheme?
    Anyone interested in an investment avenue that  could yieldsreasonable returns in the long-term and provides tax-saving benefits can invest in ELSS funds. So, if you have long-term financial goals like retirement planning, buying a house or financing your child’s college education, these funds can be a suitable option.
  5. How much can one invest in a financial year?
    There is no upper limit on how much you can invest in a financial year. You can invest as much as you want based on your budget and financial goals. However, you can avail tax-saving benefits on ELSS investments up to Rs. 1.5 lakh every year.
  6. How can I invest in an Equity Linked Saving Scheme fund?
    These funds are managed by Asset Management Companies (AMCs). Compare the fund option of  different AMCs and choose the one matching your investment needs. Create an account with a fund house and invest accordingly. Alternatively, you can approach your financial advisor for choosing the right ELSS for you.
  7. Are ELSS funds risky?
    As the name suggests, ELSS funds are exposed to equities. And like any other market-linked mutual fund, these funds are also subject to the risks associated with the stock market. However, you can mitigate this risk by investing in Equity Linked Saving Scheme with a long-term approach.

Investment in ELSS is subject to lock in period of 3 years from the date of allotment of units. Investors are advised to consult their tax advisor in view of individual nature of tax benefit. Investors are requested to note that tax laws may change from time to time and there can be no guarantee that the current tax position may continue in the future. The comparison of ELSS Vs other traditional savings instruments has been given for the purpose of the general information only. Investment in ELSS carry higher risk, does not guarantee returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. Franklin Templeton Mutual Fund / Franklin Templeton Asset Management (India) Private Limited will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information.

Next To Come: ELSS funds vs. ULIP: Comparing Equity Linked Saving Scheme with Unit Linked Insurance Plans