What are ELSS funds and how you can invest in them?

If you want to save taxes under the old tax regime, ELSS are one of the best choices. They provide you with good returns too

Kavya Balaji   /   September 9, 2020
ELSS Funds

Equity Linked Saving Schemes (ELSS) or tax saving mutual fund schemes as they are called, help investors to save taxes. This is because investments in ELSS funds qualify for a tax deduction. However, this is possible only if you choose the old tax regime. You can invest in ELSS funds without any tax benefits if you choose the new tax regime.

The investments in ELSS are subject to a lock-in period of three years. ELSS is considered as one of the best options to save taxes and create wealth in the long run. Here is all the information you need on ELSS funds.

Benefits of investing in ELSS

Higher returns

Although the risks are higher, investments in ELSS funds have the potential to deliver significantly higher returns when compared to traditional tax saving investments. While PPF and NSC give you 7.9% per year, the five-year post office deposits give only up to 7.7%. Even the 5-year bank fixed deposits give you much lesser return. However, ELSS can provide you with much more returns than these traditional schemes. For instance, the Axis Long Term Equity Fund which is an ELSS fund has provided annualised returns of 16.7% every year for the last three years. The ten-year return of this fund is at 17.89%. Since ELSS funds are essentially equity schemes, they are able to deliver exponential returns in the long run if you stay invested in them.

Tax exemption

The Income Tax Act allows taxpayers to invest in specific securities and taxpayers can claim it as a deduction from their taxable income. ELSS is one of the approved securities under Section 80C of the Income Tax Act, 1961. Others include Public Provident Fund (PPF), postal savings like National Savings Certificate (NSC), tax-saving fixed deposits and National Pension Scheme. So, investments of up to Rs. 1.5 lakh in these schemes, which includes ELSS, is eligible for tax exemption.

Lower tax

The returns from this fund are taxed like gains from any other equity mutual fund scheme. When you sell your ELSS funds, only long-term capital gains of over Rs 1 lakh are taxed at 10%. So, if your capital gains are less than Rs 1 lakh, you dont need to pay any tax. Suppose an investor has made a capital gain of Rs 1.2 lakhs on the investment in this scheme, and withdraws the amount after three years, capital gains tax of 10% will be levied on Rs. 20,000. The tax payable will be just Rs 2,000.

Lesser lock-in period

While PPF has a maturity tenure of 15 years, NSC has to be held for five years. ELSS has the shortest lock-in period of three years among all 80C investments.

Possibility of income

You can opt for dividend pay-outs if you want to receive regular income. You get this income whenever the fund declared dividends even during the lock-in period.  

Lower costs

ELSS mutual funds do not have any entry or exit load (but remember there is a 3-year lock-in).

Who can invest in ELSS?

Any one including Non-Resident Indians (NRI) can invest in ELSS funds. However, if you are a resident of the United States of America (USA), investing in Indian mutual funds is not recommended because of Passive Foreign Investment Company (PFIC) related taxation and reporting problems.

ELSS is suitable for investors with a long-term investment horizon of more than three years. As the underlying assets mostly comprise of equity securities which are quite volatile, it is important that the investor have a high-risk appetite.

How much can you invest?

You can invest as little as Rs. 500 in an ELSS fund. While you can claim tax benefits of only up to Rs.1.5 lakhs, you are free to invest as much as you want in ELSS funds.

How to invest in ELSS funds?

You can invest in ELSS like you do for any other mutual fund. The easiest way is online investing. You can invest in ELSS seamlessly through online platforms such as Wealthzi.com or directly through the websites of the Asset Management Companies (AMCs) whose funds you want to purchase.

If you want the conventional mode of investment, you will need to fill a form and submit it at the nearby branch of the fund house.

You can make ELSS investments either as a lumpsum or using the Systematic Investment Plan (SIP) route. Note that each SIP you make will have a lock-in of three years. If you want to redeem your funds after three years, it is best to make a one-time investment. Looking for the best ELSS funds? Get in touch with the wealth consultants at Wealthzi.

Check out our selection of ELSS Funds.

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