It is that time of the year when there is a rush among tax savers to invest as they have to submit proofs to their employers. Investors can save tax by investing upto Rs. 1.5 lakh under Section 80 C of the Income Tax Act. With markets in the midst of a bull run, the Equity Linked Savings Scheme (ELSS) of mutual funds are in flavour among tax-savers due to their lowest lock-in period of three years as compared to other options, such as PPF, NSC and Bank Fixed Deposits. The ELSS category of mutual funds have given an annualized return of 18.13% in the past 5 years. (Source: Ace MF; Data as on 21st Dec 2017)

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What is Equity-Linked Savings Scheme (ELSS)?
The acronym “ELSS” stands for Equity Linked Savings Scheme. ELSS is a type of diversified mutual fund which is qualified for tax deduction of upto Rs.1.5 Lakh in a financial year under section 80C of the Income Tax Act, 1961. ELSS funds have a mandatory lock-in period of 3 years and invest a major portion of their portfolio in the stock market. It offers the twin advantage of capital appreciation and tax benefits.
How do I invest in ELLS Funds?
Investments can be made in a lump sum and through Systematic Investment Plans (SIP) that allows you to average out the cost of your investments and save you from catching a market peak or timing the markets. Do remember that each SIP is considered as a fresh investment and every individual SIP carries a lock-in of 3 years. To invest in ELSS Click here.
What benefits are available for investing in ELSS funds?
Investments of up to Rs 1.5 lakh in ELSS funds earn a tax rebate under Section 80C of the Income Tax Act, 1961 every year. The returns generated on the investments are also tax-free in the hands of the investor after the completion of the mandatory 3 year lock-in period. In case of SIP investments, redemptions can be done on a First-In-First-Out basis since each individual SIP has a mandatory lock-in period of 3 years.

As ELSS funds invest your money in equity, there is a higher probability for you to earn higher returns compared to fixed income / pure debt-based instruments alongwith with tax exemptions.
ELSS schemes allow you to invest in a disciplined and systematic manner with amounts as low as Rs. 500 per month. Your savings thereby do not just remain savings; they actually get converted into your investments. This nurtures a habit of financial discipline and continuous investing, irrespective of the market ups and downs. Since there is a mandatory lock-in period of 3 years, if you start an SIP in an Equity Linked Saving Schemes, the returns for your SIP amounts will be generated every month after 3 years of the first investment. Besides, the returns will be eligible for tax exemptions.
ELSS also allows you to secure the benefits of equity mutual fund schemes to ride the growth cycle of stocks in your ELSS portfolio. Whereas traditional debt-based fixed income instruments can give at the most 8% returns, investing in equity has the potential to earn higher returns in favourable situations in the stock market. In a rising economy like India, a good portfolio with quality well-researched stocks may help reap higher returns for you.
Comparison of ELSS with other tax-saving instruments
ELSS v/s Tax Saving FDs
  1. Since ELSS returns are not fixed, the chance of getting much higher returns than FD’s over the long term is high
  2. Minimum lock-in is of 3 years compared to 5 years for FD’s
  3. ELSS carries some risk while FD’s, although upto Rs. 1 lakh per account is comp-letely risk-free, all FD’s are perceived to be risk-free
  4. Minimum investment tenure in ELSS is 3 years and one can continue to invest in that for years. In FD’s, investments are allowed only for a fixed term, usually 5-10 years.
ELSS Returns v/s other tax-saving instruments:-
Financial Product Type of return Lock-in Returns
ELSS Market linked (Equity) 3 years 12-15% over long run
NPS Market linked (Debt & Equity) Till retirement 8-10% over long run
PPF Guaranteed 15 years 7.8% (re-set every quarter)
Insurance Market linked / Guaranteed Till maturity 4-10% (depending on product)
Bank FD Guaranteed upto Rs. 1 lakh per account Min 5 years 7-9%
Compared to traditional fixed-income instruments liked PPF, NSC & Bank FD, you can enjoy superior benefits with ELSS:-
  1. Lowest lock-in period of 3 years in the tax saving instruments category
  2. Potential for higher returns due to investments in equity
  3. Tax benefit upto Rs. 1.5 lakh (Under Section 80 C of the Income Tax Act, 1961)
  4. Tax-free dividends in the hands of the investor
  5. Convenience / Flexibility of investing (Lump Sum / SIP / STP)
  6. No upper cap on the maximum investment amount
  7. Investment with an amount as low as Rs. 500/- is possible
  8. No long term capital gains tax
  9. Choice of Asset Management Companies (AMC), Schemes & Options (Growth / Dividend / Reinvestment)
ELSS Performance:
AUM as on 31-12-2017
Equity-Linked Savings Scheme
Morning Star
1 Year
in Cr.
3 Years 5 Years
Aditya Birla SL Tax Relief '96(G) 30.850 -2.20 15.68 18.71 4,539.23 Invest Now
Axis LT Equity Fund(G) 42.672 1.62 14.51 18.52 16,108.00 Invest Now
Franklin India Taxshield(G) 561.572 -1.37 11.88 15.85 3,471.09 Invest Now
Reliance Tax Saver (ELSS) Fund(G) 54.190 -17.83 9.99 15.90 10,758.00 Invest Now
SBI Magnum TaxGain'93-Reg(G) 140.378 6.60 18.06 17.11 6,600.00 Invest Now
Past performance is not an indicator of future returns | Source: Morning Star rating as on January 2018

To boost the habit of savings and investments, the government has allowed every individual taxpayer to invest and buy certain financial products which will allow them to avail of tax deductions. Under Section 80 C of the Income Tax Act, 1961, a tax payer could invest a total of Rs. 1.5. Lakh per annum in ELSS of mutual fund houses, EPF, PPF, tax-saving FDs, NPS, life insurance products and some other approved financial products, which will reduce the person’s tax liability. Payment of home loan principal and tuition fee of children also come under this section for tax deductions.

ELSS funds don’t guarantee assured returns because they earn from investments in the equity market, which itself are not guaranteed. However, historical evidence shows that the best performing funds have displayed the capability of generating inflation beating returns over the long-term. This is something that traditional & conservative / low-risk fixed income tax saving investments like PPF and FDs cannot do.

An ELSS investment can be started with a minimum amount of Rs 500. There is no upper limit on how much you can invest in ELSS funds, however, tax benefits are capped at a maximum of Rs. 1.5 lakh per year.

ELSS funds have a mandatory lock-in period of 3 years. But you can stay invested in them, with or without further contributions, for as long as you want. You can also stop an ELSS SIP at any point of time; however, the invested amount can be withdrawn only after the completion of 3 years.

Individuals as well as HUFs can invest in tax-saving mutual funds. At present, most mutual fund companies do not accept investments from NRIs who are US and Canadian citizens. NRIs living in other countries are permitted to invest in ELSS funds.

ELSS funds do not allow premature redemptions before completion of the mandatory 3 year lock-in period.

Your mutual fund company would send quarterly statements about the performance of their investments. You can view your investment value even by using the online facilities offered by the mutual fund company.

ELSS funds have two plan options: Growth and Dividend. The Growth option is the recommended plan for long-term wealth creation. Under the Dividend option, the investor can choose between dividend payout or dividend reinvestment. The dividend received will not be taxable. If you choose dividend reinvestment, it will be treated as a fresh investment and you can claim tax benefit on it as well.

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