ELSS or Equity Linked Savings Scheme - Meaning, Features and Tax Benefits

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Hiral Vakil

Section 80C
Last updated on April 16th, 2021

ELSS stands for Equity Linked Savings Scheme. It is equity-based tax savings mutual funds that qualify for income tax deductions u/s 80C. Investments made up to INR 1.5 lacs under ELSS qualify for tax benefits. It has a lock-in period of 3 years. Any individual who is KYC verified can invest in ELSS. In the case of minors, the guardian has to be KYC verified while investing in the name of the minor. The minor, upon attaining majority should immediately complete the KYC verification process.

What are the Features of ELSS?

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What are the Advantages of Investing in ELSS?

An individual investing in ELSS can have many benefits, some of the major advantages are as follows:

Income Tax Benefits

The amount invested in ELSS, up to INR 1,50,000 can be claimed as a deduction under section 80C. Apart from getting a tax benefit on the sum that is invested, deductions are also available on the capital gains. It is important to note that ELSS comes with a lock-in period of 3 years hence the long capital gains if less than INR 1,00,000 is exempt from tax. If LTCG is more than INR 1,00,000 then excess gains are taxed at 10%

Short Lock in Period

In comparison with other tax saving schemes, the lock-in period in ELSS is the shortest i.e. of 3 years. On the contrary, the lock-in period in PPF is 15 years and 5 years in FD. ELSS’s main advantage is that it is a scheme that offers high return within a shorter lock-in period.

Compounding Benefit and Higher Return

If investing in equity oriented funds it is always advisable to invest for a longer period of time so that one can benefit from compounding effect. The 3 year lock in period in ELSS comes as an added benefit as it allows the individual to reap the benefit of compounding. Investemnets made in ELSS is majorly in equity oriented funds and hence the returns are higher when compared to other saving schemes.

What are the Documents Required to Invest in ELSS Funds?

The investor needs to be KYC verified to start investing in funds. If you are KYC verified, you can start investing right away. If you are not KYC verified, you will have to complete the verification process before you can start investing. The documents required for KYC verification are:

What are the ways to invest in ELSS?

There are mainly 3 ways in which you can invest in ELSS:

Growth Option

Under this option the investor will be able to gain the benefit only at the time of redemption. There is no dividend availabe under growth option. However, redeming total gains at the same time helps to appreciate the total NAV and as a result, multiplies the profit.

Dividend Option

Dividend option as the name suggets offers the investors the advantage of recieving dividends at a regualr itervals provided that dividend is declared. Additionaly, the dividend is completely tax free in the hands on the investor.

Dividend Reinvestment Option

Under this option, the dividend amount is invested back to the NAV. Investors choose this option when when the market is observing an upswing and is likely to continue the same way.

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Is there any limit for investment in ELSS? 

There is no upper limit for investment into Equity Linked Savings Scheme. However, only Rs. 1,50,000 will be qualified as a deduction under section 80C. The minimum amount you can invest in ELSS is Rs. 500.

Is return on ELSS taxable? 

No. Both principal amount of investment and return on maturity are exempt from tax.

Is there any tax on capital gains from ELSS?

The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1 lakh, and dividend received is tax-free in the hands of investors.

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

No, there is no maximum investment duration, if an investor is satisfied with the returns he/she can continue with the scheme.

Is SIP as an option available under ELSS?

Yes, while investing one can

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback. :slight_smile:

  5. Hey @shindeonkar95

    In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.

    However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.

    Hope, it helps!

  6. Hello,

    Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?

    There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?

    I couldn’t find anything on this. Any help is appreciated.

  7. Hello @Veejayy,

    Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.

    Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.

    These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!

    Also, interest earned on these bonds will be taxable.

    Hope this helps!

  8. Hi, I need to file my income tax for FY21, I am using Quicko platform for filing, I wanted to confirm if the ELSS investment amount for the FY21 is to be added in the section 80C, since I already the amount of Rs30,072 , should I add my ELSS amount to this existing amount and submit the total

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