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
- ELSS funds have a lock-in period of 3 years.
- Since the lock-in period is more than 12 months, income is treated as LTCG and taxed in accordance with Income tax rules.
- The minimum amount to begin investing in the ELSS scheme is INR 500. However, there is no maximum limit that one can invest.
- ELSS funds are essentially Equity-based mutual funds as at least 80% of the investible portion is invested in equity or equity-based component.
- The fund works in a diversified manner which means which implies distributing investments across various financial instruments, industries, and categories.
- They offer a tax deduction under Section 80C.
Tax Implications on Income Earned from ELSS
- Redemption Amount– As we know, ELSS comes with a lock-in period of 3 years, and any asset type which has a period of holding of more than 12 months is considered as Long Term Capital Gain. Hence, if the returns earned from ELSS are less than 1 lakh it is exempt from tax. However, if the return earned is more than 1 lakh, excess gains will be taxed at 10% under LTCG.
For example, Arun invested INR 2 lakh in an ELSS scheme in January 2019. He redeems all the units in February 2022 after the lock-in period of 3 years at INR 4 lakh. So LTCG on the principle amount is INR 2 lakh.
As mentioned previously, LTCG is exempt from tax till INR 1 lakh. Hence, Arun won’t have to incur any tax till INR 1 lakh.
LTCG on ELSS = 1 lakh * 10% = INR 10,000. - Dividend Amount– Dividends earned from the scheme are fully taxable as per slab rates under Income from other Sources.
- The amount invested in ELSS, up to INR 1,50,000 can be claimed as a deduction under section 80C.
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.
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:
Various ELSS Investment Options
There are primarily three ways to invest in ELSS. They are as follows:
- 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.
- Dividend Option: As the name suggests, investors receive benefits in the form of dividends at regular intervals provided that the dividend is declared.
- 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.
| Particulars | Amount |
| Date of Purchase | 1st April 2022 |
| No of Units | 1000 |
| NAV (Net Asset Value) | INR 200 |
| Total Amount | INR 2 lakh |
| Lock-in Period | 3 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 Date | No of Units | NAV | Amount (INR) | End of Lock-in Period |
| 04th April 2022 | 50 | 40 | 2,000 | 04th April 2025 |
| 04th July 2022 | 80 | 50 | 4,000 | 04th July 2025 |
| 04th October 2022 | 350 | 60 | 21,000 | 04th October 2025 |
| 04th January 2023 | 200 | 80 | 16,000 | 04th January 2026 |
| Total | 680 | 43,000 |
Note: When determining the 3-year lock-in period under SIP, each installment needs to be treated independently.
Advantages of ELSS
- Shortest lock-in period: The lock-in period is 3 years which is lower compared to other schemes.
- Convenience: Investors can choose the method of SIP or lumpsum based on their affordability & convenience.
- Tax Benefit: ELSS mutual fund can help you save tax of up to INR 46,800 by investing INR 1,50,000 under Section 80C.
- Expert Management: Experts keep an eye on ELSS mutual funds. Hence, they use their expertise and alter stocks by analyzing market trends.
- Compounding Benefit & Higher Returns: With the power of the compounding effect, returns are higher when compared to other saving schemes.
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:
- Identity Proof
- Address Proof
- PAN Card
- Passport Size Photograph
FAQs
You can invest as little as INR 500 in ELSS. There is no upper limit for investment in Equity Linked Savings Scheme.
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.
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.
Yes. One can choose the SIP option to invest in ELSS.
Hi @Palasha.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.
@Muskan_Balar Is trading account mandatory for investment in ELSS?
Hey @akash_jhaveri,
Hope this clarifies!
I have investment in elss fund a and elss fund b. If investment in A and B add up to 1.5L can I claim that under 80C 1.5L exemption? Or does it have to be one elss fund only?
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.