ELSS: Tax Saving Funds

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Zainab Hawa

ELSS
Section 80C
Last updated on January 18th, 2024

ELSS (Equity Linked Savings Scheme) is a type of mutual fund that invests primarily in equity and equity-related instruments. It provides tax benefits under Section 80C of the Income Tax Act in India. By investing in ELSS, investors can claim deductions on their taxable income, making it a popular choice for those who want both capital appreciation and tax savings. ELSS funds have a lock-in period of three years, which is shorter than other tax-saving investment options.

Key Features of ELSS

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Tax Implications on Income Earned from ELSS

Considering the above example, Arun qualifies for a deduction of INR 1,50,000. He can claim the deduction u/s 80C while filing the return for FY 2019-2020.

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Lock-in Period in ELSS

The lock-in period for ELSS funds is 3 years. It is important to note that there is no provision for premature withdrawal.

In comparison with other tax saving schemes, the lock-in period in ELSS is the shortest. Hence, ELSS’s main advantage is it offers high returns with a short lock-in period.

The below table shows the minimum lock-in period of various other schemes:

There is no maximum tenure of investment. Hence, if your ELSS funds show profitable growth, you can choose to remain invested even after the lock-in period. Or you can redeem the earnings and your fund.
Tip
There is no maximum tenure of investment. Hence, if your ELSS funds show profitable growth, you can choose to remain invested even after the lock-in period. Or you can redeem the earnings and your fund.

Various ELSS Investment Options

There are primarily three ways to invest in ELSS. They are as follows:

  1. Growth Option: Investors do not receive any dividends under the growth option. Benefits are only distributed to the holders at the time of redemption. However, redeeming total gains at the same time helps to appreciate the total NAV and as a result, multiplies the profit. The market condition determines how much money an investment makes.
  2. Dividend Option: As the name suggests, investors receive benefits in the form of dividends at regular intervals provided that the dividend is declared.
  3. Dividend Reinvestment Option: Under this option, the holder will have the option to re-invest the dividend into the funds i.e., the value will add to the NAV. This option is often chosen by investors when the market is observing an upswing and is likely to continue in the same way.

Ways to Invest in ELSS

There are two ways to invest in ELSS:

One-time Lumpsum investment

Investing in lumpsum is a technique where the investor purchases all the units of ELSS in one go. It is a one-time commitment that gives investors the freedom to decide how much money to invest when to invest, and how much. Hence, it is a popular scheme where investors reap the benefit of market volatility by purchasing more units when the market is down and fewer units when it is up.

Let us take an example to understand better: Akash decides to invest in the ELSS fund. He purchases 1000 units of ELSS for INR 2 lakh on 1st April 2022.

ParticularsAmount
Date of Purchase1st April 2022
No of Units1000
NAV (Net Asset Value)INR 200
Total AmountINR 2 lakh
Lock-in Period3 Years

Under the above case, the 3-year lock-in period ends on 1st April 2025 and Akash can decide whether he wants to continue with the scheme or not.

By the way of SIP

SIP stands for Systematic Investment Plan. It is a technique where the investor invests a fixed amount at regular intervals instead of investing large money at once. It helps to reduce risk by averaging costs over time and building larger portfolios with smaller investments.

Let us take an example to understand better: Tarun, a smaller investor, wants to invest in ELSS but is unable to make a lump-sum investment. So he decides to opt for the quarterly SIP option and acquire wealth over a period of time.

Purchase DateNo of UnitsNAVAmount (INR) End of Lock-in Period
04th April 202250402,00004th April 2025
04th July 202280504,00004th July 2025
04th October 20223506021,00004th October 2025
04th January 20232008016,00004th January 2026
Total68043,000

Note: When determining the 3-year lock-in period under SIP, each installment needs to be treated independently.

Prior to making an investment, you should research the top performing ELSS funds based on the past 3 years' returns.
Tip
Prior to making an investment, you should research the top performing ELSS funds based on the past 3 years' returns.

Advantages of ELSS

Documents Required to Invest in ELSS Funds

Having a de-mat account or trading account is a prerequisite to investing in ELSS funds. Further, before beginning to invest in funds, the investor must have their KYC validated. However, if you are not KYC verified, you will have to complete the verification process before investing.

The documents required for KYC verification are:

FAQs

Is there a cap on ELSS investments?

You can invest as little as INR 500 in ELSS. There is no upper limit for investment in Equity Linked Savings Scheme.

Is there any tax on capital gains from ELSS?

Long-term capital gains from ELSS are tax-free up to INR 1 lakh. The excess gains will be taxable as LTCG at 10%. Further, the dividend received is taxable at the slab rate.

Is it mandatory to redeem the investment amount after the completion of 3 years?

No, there is no maximum investment duration. If an investor is satisfied with the returns, they can continue with the scheme and choose to remain invested.

Is the SIP option available under ELSS?

Yes. One can choose the SIP option to invest in ELSS.

Got Questions? Ask Away!

  1. Hi @shreya.sharma,

    There is no maximum limit to the amount you can invest in a mutual fund. However, every mutual fund would have some minimum criteria.

    Hope it helps.

  2. Hey @akash_jhaveri,

    Hope this clarifies!

  3. Hey @Chb,

    Yes, you can claim the deduction for investments in both funds. The total upper limit is ₹1.5 lakhs and the number of funds no not matter in this case.

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