Tax planning is tedious, but there’s a simple way to grow your money and enjoy tax benefits. Planning your finances involves planning taxes, and Section 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain instruments. Equity Linked Savings Schemes or ELSS is a tax saving mutual fund and one of the most popular investment options among the other investment options under the Section 80C. ELSS fund is an equity-diversified fund.

Wait. That sounded like Greek to me!

What is an equity-diversified mutual fund?

It’s a mutual fund that invests primarily in the equity markets or stock markets across various sectors and companies. Hence, ELSS funds allow you to enjoy reasonable returns while you save tax.

Why an ELSS?

Investments in ELSS funds are exempt from Tax Deduction under Section 80C up to Rs. 1.5 lakhs.

• ELSS funds have the shortest lock-in period of only 3 years among all Section 80C tax saving investment options This means that contribution to the fund, both onetime investment and Systematic Investment Plan (SIP) will be locked in for three years from the investment date. So, if you invest in an ELSS fund through SIP, every SIP instalment will be locked for three years. You can’t withdraw any money during this lock-in period. This is one of the benefits of ELSS funds because the lock-in period of other tax saving options is a minimum of 5 years.

• ELSS funds invest at least 80% of its assets in equities and equity-related instruments. As a result, investment in this tax saving mutual fund has the potential to give inflation-beating returns.

• ELSS is an open-ended equity mutual fund, so you can continue investing in the fund after the lock-in period is over to achieve your long-term financial goals.

There is no maximum investment amount. You can earn returns on your entire investment, but a maximum of Rs.1.5 lakh will be calculated for saving tax.

Payment Options

An ELSS fund has two options: dividend and growth. A dividend is a distribution of a portion of a company's profits. If you opt for the dividend pay-out option, then you get a dividend income during the fund’s lock-in period whenever a dividend is declared by the fund.

If you choose the growth option, you will get the current value of your investments when you redeem your units.

If you don’t have any immediate need of funds, choosing the growth option will be the best option for you, as your investments can continue to grow till you redeem.

A word of caution

Remember to do your research before you put your money in an ELSS fund. Look at the long-term performance and other details of the fund. If you’re an investor with a high-risk appetite with long-term financial goals, then ELSS funds could be the best tax saving instruments.

Key takeaway

When investing in a tax saving option, the focus should be on the nature of the investment option and ability to save tax should be an added advantage. Similarly, when investing in an ELSS fund, prioritise on achieving your long-term financial goals.

Know what your financial goals are, and what your risk appetite is before investing in an ELSS fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.