What is ELSS Mutual Funds?
- 6 min read
Being an Indian investor, paying tax is crucial whether you trade stocks or invest in mutual funds. These taxations can significantly affect your returns from capital gains from mutual fund investments.
However, equity-linked saving schemes (ELSS) allow you to save taxes on mutual funds up to INR 1.50 lakh in a financial year. Read this blog to learn more about the ELSS mutual funds and how to invest in them.
What are ELSS Mutual Funds?
ELSS funds are a special category of funds that invest a minimum of 80% of their corpus into equities or equity-based instruments. Often called tax-saving schemes, these mutual funds are eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961.
You can claim a tax rebate up to INR 1.50 lakh and save taxes up to INR 46,800 while investing in these funds. ELSS funds have a 3-year lock-in period, after which you can redeem 100% of your total investments without any limitations.
Let us explore the essential features of ELSS funds.
Essential Features of ELSS Funds
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Diversification
Although it invests the majority of its funds in equities, it embraces diversification by investing in companies with different market capitalisations and sectors.
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Lock-in Period
There is a 3-year lock-in period in ELSS mutual funds, which shows that redemption can only be done after the completion of 3 years. This is the lowest among all tax-saving instruments like National Savings Schemes and Public Provident Fund (PPF).
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No Maximum Investment Tenure
There is no maximum limit on the investment tenure in ELSS funds.
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Inflation-Beating Returns
ELSS funds are considered the only mutual fund scheme to offer inflation-beating investment returns.
How to Invest in an ELSS Fund?
Investing in ELSS mutual funds is very simple. Follow the steps below to invest in the tax-saving mutual fund scheme:
- First of all, choose the platform through which you can invest in ELSS funds. You can use online platforms or through registrars and agents.
- Research on the numerous ELSS funds and choose which one you want to invest in.
- Plan the amount which you want to invest in the scheme. The minimum lump sum amount you can invest in ELSS funds is INR 500, while there is no maximum limit on the amount to invest. However, you can only avail a maximum of INR 1.50 lakh in a fiscal year.
- For systematic investment plans (SIP), you need to complete your KYC process, enter the bank details, and draw an electronic clearing service (ECS) mandate to make the transaction process easy.
- The SIP amount will be deducted automatically on the instalment date chosen by you.
You can open a Demat account with PL Capital Group – Prabhudas Lilladher to invest in mutual funds via both SIP and lump sum. PL have partnered with India’s Top Mutual Fund AMCs to provide you with the best investment options.
Tax Advantages in ELSS Funds
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Tax Deduction Under Section 80C
ELSS can reduce your taxable income since the investments made in a fiscal year are eligible for a deduction of up to INR 1.50 lakh.
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Long-Term Capital Gains (LTCG) Tax
Your profits on ELSS funds are subject to fall under the LTCG rate of 12.5% on capital gains. Up to INR 1.25 lakh of your profit will be exempt from tax.
Benefits of Investing in ELSS Mutual Funds
ELSS mutual funds not only offer tax benefits but also help you guarantee returns. Below are the benefits of investing in ELSS funds:
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Diversification
Investing in ELSS can help you diversify your portfolio, since it invests in a diverse range of companies, ranging from large- to small-cap companies.
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Minimum Investment
Most of the ELSS mutual funds allow you to start investing with a minimum amount of INR 500. You do not have to worry about putting a large amount of funds into it.
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Discipline
The 3-year lock-in period in this scheme helps you to stay disciplined and focused on your investment goals. Although it restricts the redemption, the lock-in period ensures long-term capital appreciation.
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SIP Option
If you go with an SIP, you can avail the benefits of rupee-cost averaging and compounded returns on your investments.
ELSS vs Other Tax-Saving Instruments: Key Differences
There are numerous tax-saving investment options, but their returns are limited. This provides an advantage for you if you invest in ELSS mutual funds. The table below highlights the top tax-saving schemes in India, with their returns, lock-in period, and tax benefits:
| Schemes | Possible Returns | Lock-in Period | Tax Deductions on Returns |
| ELSS Funds | 15% – 18% | 3 years | Deductions up to INR 1.50 lakh |
| National Savings Certificate | 7.7% | 5 years | Deductions up to INR 1.50 lakh |
| Public Provident Fund (PPF) | 7.1% | 15 years | Deductions up to INR 1.50 lakh |
| 5-Year Bank Fixed Deposit | 5% to 7% | 5 years | Deductions up to INR 1.50 lakh |
Final Thought
ELSS mutual funds can provide you with higher returns and help you diversify your portfolio. Starting investment with a minimum amount of INR 500, you can get inflation-beating returns and tax benefits up to INR 1.50 lakh.
Download the PL Capital application and open a Demat account to invest in top Indian mutual fund schemes. PL also offers you personalised recommendations from experts.
Frequently Asked Questions
1. Is ELSS subject to taxes after three years?
ELSS is not subject to taxes after three years. It is taxable only when you sell the funds, and if you receive returns above INR 1.25 lakh in a financial year.
2. Which is better, mutual funds or ELSS?
Investing in ELSS mutual funds and other mutual funds has different investment goals. ELSS prioritises tax-saving, and mutual funds offer better liquidity and flexibility.
3. Is it possible for me to withdraw my ELSS investment before the lock-in period expires?
No, you cannot redeem or withdraw ELSS investments before the 3-year lock-in period. You can only withdraw it after the end of 3 years.
4. Are ELSS funds appropriate for novice investors?
ELSS mutual funds are appropriate investment options for novice investors. It can generate long-term wealth with a 3-year lock-in period. This encourages discipline among novice investors while offering tax benefits.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
