An ELSS is an Equity-Linked Savings Scheme, which allows an individual or HUF to deduct up to Rs. 1.5 lacs from their total income under Section 80C of the Income Tax Act of 1961. Consequently, if an investor invested Rs. 50,000 in an ELSS, this sum would be deducted from his or her total taxable income, reducing her tax liability.
The lock-in period for these investment plans is three years from the date of unit allocation. After the lock-in time has expired, the units may be redeemed or exchanged. ELSS offers both dividend and growth options. Additionally, investors can invest through Systematic Investment Plans (SIP), and investments up to 1.5 lakhs made in a fiscal year are eligible for tax deduction.
Advantages of ELSS Tax-Saving Funds:
The following are the benefits of investing in ELSS:
- The investment in ELSS is rather modest, as it can be as low as Rs 500 per month or as a single payment. A lower investment alternative is a relief for conservative investors, who may save money and diversify their portfolios by investing in this programme. This is suited for investors with a steady income.
- You can invest in ELSS through a systematic investment plan (SIP), in which you invest a small amount each month and receive tax benefits as your investment rises progressively.
- The majority of ELSS plans diversify the portfolio among several equity sectors, such as small-cap, mid-cap, and large-cap funds.
Features
- Dividend and Growth Options – The investor may select either the dividend or growth option for their Equity-Linked Savings Account. After the lock-up period, the investor will get a lump payment in the growth scheme. During the three-year lock-in period, the investor will receive regular dividends under the dividend plan (at the discretion of the fund manager).
- Tax Benefits – Returns earned from an Equity-Linked Savings Scheme are exempt from taxation. According to the provision provided in Section 80C of the Income Tax Act, up to Rs. 1,50,000 of the investment can be deducted from the gross total income.
- Systematic Investment Plan – An investor can invest in ELSS using a SIP or Systematic Investment Plan. This also aids in the planning and execution of your tax savings.
Who Can Invest in ELSS?
ELSS is an excellent investment choice for individuals in the early stages of their careers. ELSS can be considered by individuals with modest incomes who are interested in investing in relatively low-risk items. This strategy is particularly appropriate for investors who generate considerable income through high-risk investments and need a way to reduce their tax liability.
Individuals can begin investing in ELSS as soon as they begin to receive income because there is no minimum age requirement. Individuals seeking diversification in their investments can also benefit from ELSS by investing in the top three or four high-performing ELSS to accumulate outstanding returns over time. However, historical returns are not indicative of guaranteed future returns.
List of Top Seven ELSS Funds (as per 3-year return)
| Scheme | 3-Year Return | AUM |
| Quant Tax Plan | 42.19% | 2,374.09 |
| Parag Parikh Tax Saver Fund | 25.77% | 908.57 |
| IDFC Tax Advantage Fund | 25.62% | 4,081.12 |
| Bank of India Tax Advantage Fund | 25.38% | 697.89 |
| Canara Robeco Equity Tax Saver Fund | 23.05% | 4,576.03 |
| PGIM India ELSS Tax Saver Fund | 22.05% | 451.15 |
| Mirae Asset Tax Saver Fund | 21.57% | 14,273.62 |
Source: AMFI (data as of 07/12/2022)
FAQ
1. What is the lock-in period?
Lock-in period is the time period during which investments must be made in order to receive tax benefits. The duration of ELSS is three years.
2. What are the tax benefits of ELSS funds?
Under section 80C of the income tax act, the maximum tax benefit available for investments in ELSS funds is Rs. 1.5 lakhs. For the purposes of claiming a tax deduction, investments above Rs. 1,50,000 would not qualify as qualifying investments.
3. What is a mutual fund NAV?
Net asset value NAV is the fund’s market price. It is significant because it shows the value of each fund share. Similar to how stocks have a share price, mutual funds have a NAV to represent their value.
4. Where do ELSS funds invest in?
ELSS Mutual Funds are required to invest a minimum of 80% of their assets in equities. There is no regulation dictating which industry or company size must be allocated. This gives funds in this category the flexibility that a portfolio fund manager believes will yield the highest returns. In addition, a Fund Manager can modify the portfolio based on his market knowledge. Despite this flexibility, the majority of funds in this category are large cap-heavy, meaning that the majority of their assets are invested in India’s top 100 firms. They do allocate to midcaps and smallcaps, but at a lesser level than large caps.
