Competitive returns and tax benefits are two benchmarks based on which most people analyse investment options. ELSS (Equity Linked Savings Scheme) mutual funds fulfil these expectations to a large extent.

But what is ELSS fund? What tax benefits does it offer? Check out this blog to learn what these funds are, their features, benefits, and more.

What is an ELSS Fund?

ELSS is an open-ended equity-oriented mutual fund scheme that invests at least 80% of the portfolio in equity and related instruments. The rest is invested in a mix of debt-based assets. While the equity component aids in wealth creation, the debt portion adds stability.

Moreover, ELSS is the only mutual fund category eligible for tax deductions under Section 80C of the Income Tax Act. Also known as tax-saving mutual funds, they come with a statutory lock-in of 3-years.

So, it offers the dual benefit of capital appreciation and tax savings.

What are the Features of the ELSS Fund?

Now that you know ELSS meaning, let us quickly go through the top features of these schemes-

• Capital Growth with Stability

The combination of equity funds and debt instruments enables ELSS funds to grow your capital without the higher potential risk of pure equity funds. The debt component tends to cushion the portfolio against steep market corrections.

• Shorter Lock-In Period

A few more investment options, like tax-saving FDs and PPF, are eligible for tax deductions under Section 80C. However, ELSS has the shortest lock-in period of 3 years. In comparison, tax-saving FDs have a lock-in period of 5 years, and the same in PPF is 15 years.

• Higher Returns

Since ELSS funds invest a major portion of their assets into equity and related instruments, they carry high return potential. Compared to other tax-saving instruments under Section 80C (IT Act), the return potential is higher. However, ELSS also comes with a higher risk due to the equity component.

What are the Tax Benefits Offered by ELSS Funds?

Investments of up to Rs. 1.5 lakhs made into ELSS funds in a financial year is eligible for tax deductions under Section 80C of the IT Act. It can help you save up to Rs. 46,800 in taxes, if you invest Rs 150,000 in ELSS and fall in the highest tax bracket.

Also, as ELSS funds have a lock-in period of 3 years, you’ll be generating Long-Term Capital Gains (LTCG) from your ELSS investments. In equity and equity-oriented schemes, the gains from selling the units after a minimum holding period of 12 months are considered LTCG.

As per the tax laws, LTCG of up to Rs. 1 lakh from equity and equity-oriented schemes is tax-free. LTCG beyond the Rs. 1 lakh limit is taxed at 10% + cess + surcharge.
Also read about : Types of Mutual Funds

Things to Consider Before Investing in ELSS Funds

Consider the following things before investing in ELSS funds-

• Investment Objective

ELSS is much more than just a tax-saving investment. The higher equity exposure makes it an excellent choice for long-term capital appreciation. Finalize your investment objectives before investing in ELSS to get closer to your financial objectives.

• Investment Horizon

Equity investments are commonly made for horizons of above 5 years as short-term volatility in the market could impact your returns. So, you can prefer ELSS funds if you have an investment horizon of 5 years or more.

• Returns

Being market-linked investments, the returns from ELSS are not guaranteed or stable due to the higher equity exposure. Staying invested longer puts you in a better position to ride over the short-term market volitalities and optimize your returns.

What are the Options Available for Investment in ELSS?

You can invest a lump sum amount or start a Systematic Investment Plan (SIP) in any ELSS of your choice. You can claim the maximum 80C deduction of Rs. 1.5 lakhs in both ways. For lump sum investment, you can invest Rs. 1.5 lakhs at once, and with SIP, you can divide Rs. 1.5 lakhs in 12 monthly SIPs of Rs. 12,500.

Click Here to Calculate SIP

But note that as these schemes have a lock-in period of 3-years, each of your SIP will have to remain invested for 3 years. So, for instance, the SIP made on 1st August 2022 will mature on 1st August 2025, SIP made on 1st September 2022 will mature on 1st September 2025, and so on.

Click Here to know more about What is SIP

Create Wealth and Save Taxes with ELSS

The combination of wealth creation with tax savings makes ELSS an ideal addition to your investment portfolio. As you now know what is ELSS mutual funds, their features, tax benefits, and how to invest, use this information to start investing.
Also Learn about : How to Invest in Sip?

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