What is Equity Linked Savings Scheme (ELSS)?

1. As per Section 80C of the Income Tax Act, tax will be exempted on the invested amount.
2. There is no maximum tenure of invested but there is three years of lock in period.

How to Invest in an ELSS Scheme?

Equity Linked Savings Schemes have lower investment threshold - the minimum amount that can be invested is just Rs. 500. Investors can also choose to invest a lump sum of funds at a go, or invest on a monthly basis in equity-oriented assets by way of SIPs (Systematic Investment Plans).

Who Can Invest in ELSS?

ELSS is a good investment option for individuals who are at early stages in their careers. Individuals who do not earn glamorous salaries and want to make investments in products that carry relatively low risk can consider ELSS.

This scheme is also ideal for investors who earn substantially through some form of high-risk investments and require a means to save on tax.

ELSS has no age gap, so individuals can start investing as soon as they start earning. ELSS can also work very well for individuals who are looking for diversity in their investments by investing in the top three or four high performing ELSS so as to accrue impressive returns over a period of time.

What are the Tax Benefits Offered by ELSS Mutual Funds? 

Section 80C of the Income Tax Act provides tax deduction benefits on the principal amount invested by investors in an ELSS scheme. This is a cumulative deduction benefit which helps the investors to avail a tax deduction of up to Rs.1.5 lakh for investments made in instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), ELSS, etc.

In addition, all the above-mentioned schemes come with a mandatory lock-in period of three years. Hence, the investors will get long-term capital gains (LTCG) after redeeming the units. LTCG of up to Rs.1 lakh is not taxable for one financial year. Any LTCG above the specified limit is subject to taxation of 10 percent.

Why You Need to Invest in ELSS Tax Saving Mutual Funds?

ELSS Tax Saving Funds provide myriad of benefits:

1. Low minimum amount: Most ELSS schemes enable investors to start investing with an investment amount as low as Rs.500. This implies that you can begin your investment journey without having to accumulate a particular amount of investible capital.
2. Diversification: Many ELSS funds make investments in a wide range of companies starting from large cap to small cap and across various industry segments. This will add an element of diversification to your investment portfolio.
3. SIPs: Although you can invest money in a lumpsum in an ELSS scheme, majority of investors prefer to invest in SIP as this will enable them to invest in small amounts and enjoy tax benefits.

Furthermore, you can invest as much as you would like but only receive tax benefits up to the amount specified in Section 80C of the Income Tax Act. You can also choose to continue investing after the three-year lock-in term for as long as you wish.

Factors to Consider Before Investing in ELSS Funds

You need to consider the following factors before investing in ELSS Funds:

Investment + Tax Planning

ELSS mutual fund is the only type of mutual fund which makes investments in the equity market and provides tax benefits. If your goal is to save tax, then there are various options available under Section 80C of the Income Tax Act. Before you make an investment in ELSS, you should create an investment plan which allows you to achieve your financial goal. Investors can make investments in ELSS funds only to achieve their long-term financial goals.

Lock-in Period

As mentioned above, ELSS funds come with a minimum lock-in period of three years. This means that investments made by you cannot be redeemed before three years. Hence, investors who want to invest in this fund will need to consider this factor.

Advantages and Disadvantages of ELSS

What are the Options Available for Investment in ELSS?

There are three options for investors who wish to put their money into ELSS. They are as follow:

1. Growth Option
   1. Under the growth option, holders do not receive any benefits via dividends. Benefits will only be given to holders when the tenure of the ELSS is complete, and these benefits help in increasing your NAV, thereby multiplying your profits. The profits earned by an investor will depend on market conditions.
2. Dividend Option
   1. Under the dividend option, investors receive benefits in the form of dividends on a timely basis as opposed to a lumpsum figure at the end of the tenure. Any dividends earned under this option are exempt from tax and the investor will get the whole amount.
3. Dividend Reinvestments Option
   1. Under this option, a holder will have the option to return the dividends earned as doing so will mean that value is added to the NAV. A good number of investors tend to choose this option, especially when the market performance is good over the course of the 3-year lock-in period.

Comparing ELSS to other Saving Schemes