ELSS or Equity Linked Savings Scheme is an investment instrument that offers the lowest lock-in period of 3 years amongst all the others of the same category (tax saving investment instruments). ELLS offers a tax exemption of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act.
ELSS among other Tax Saving Instruments
In comparison with other tax saving options such as 5-year Bank Fixed Deposits, National Savings Certificate (NSC), National Pension System (NPS), or Public Provident Fund (PPF), ELSS offers the maximum benefits.
- You can invest in ELSS through SIP (Systematic Investment Plan) with an amount as low as Rs.500
- Investments in ELSS can offer a tax saving of Rs. 46,800 per annum for individuals in higher tax brackets
- ELSS funds offer the highest returns among all the other tax-saving investment instruments
- ELSS investments offer the dual benefits of delivering high returns and tax exemptions
- Since ELSS funds have a lock-in period of 3 years, the gains on these investments are treated as long-term capital gains, which are taxed at 10%
- ELSS funds invest in equity, and hence are highly suitable for investors who wish to generate high returns for a long term to reap the benefits
- Investing in ELSS is an easy, hassle-free and transparent process
- It must be noted that till 31 March 2018, the returns on ELSS were non-taxable. However, the introduction of new budget stated that the returns on ELSS would be taxable at a rate of 10% if the gains are over and above Rs.1 Lakh
Tax on Capital Gains
Any profit or gain that comes from the sale of a capital asset such as stocks, bonds, commodities, etc. can be referred to as the Capital Gain. Since this gain/profit is treated as income for the investor, it is liable to be taxed by the government. The asset is taxed in the year in which the transfer of the capital takes place.
Capital gains on mutual fund investments can be classified into-
- Long Term Capital Gains- LTCG must be paid on assets/funds that are held for a period of more than 36 months (3 years)
- Short Term Capital Gain- STCG should be paid on assets/funds help for a period of less than 36 months (3 years)
It must be noted that the tax rates of LTCG and STCG vary depending on their asset class. The applicable tax rate might be different for investments in equity, real estate, bonds, mutual funds, etc. and the income tax slab under which the investor falls.
Long Term Capital Gains on ELSS
The long term capital gains on the sale of funds was made taxable in the Union Budget of FY 2018-19. Before this, the LTCG earned on sale of equity shares was tax-free at the hands of the investor. Only the Short Term Capital Gains were taxed at 15%.
Since ELSS investments have a lock-in period of 3 years, the investors of these funds are liable to pay only long term capital gains tax (LTCG) on their returns. If an investor sells his/her shares in ELSS after a time period of 3 years, he/she will have to pay a tax of 10%, only if the capital gains are more than Rs.1 Lakh.
However, owing to the latest amendments in the budget, the benefit of indexation for LTCG over Rs.1 Lakh on equity investments has been removed
Let’s understand this using an example –
The returns from ELSS are taxed like that from any other equity mutual fund scheme. However, since the units can’t be redeemed before 3 years of investment, only Long Term Capital Gains Tax of 10% above ₹1 lakh will be levied.
Now, suppose the investor has made a capital gain of ₹1.5 lakh on investment in this scheme, and withdraws the amount after the lock-in period of three years, Long Term Capital Gains Tax of 10% would be levied on ₹50,000. ₹1Lakh is exempted from taxation. Hence, the payable tax would be ₹5,000.
Also Read: Best ELSS Funds to Invest in 2020
Best ELSS Funds to Invest
Given below is list of top 5 ELSS funds that you can consider investing in 2020-
| Fund | AUM
(In Crore) |
3-year Returns
(In %) |
5-year Returns
(In %) |
| Axis Long Term Equity Fund | 21,659 | 4.01 | 5.09 |
| ABSL Tax Relief 96 Fund | 10,073 | -1.22 | 3.12 |
| DSP Tax Saver Fund | 6,096 | -3.56 | -3.01 |
| Mirae Asset Tax Saver Fund | 3,282 | 0.95 | – |
| Tata India Tax Savings Fund | 2,060 | -1.84 | 3.50 |
*Data as on 31 March 2020; Source: Value Research
**It must be noted that the above funds have been listed depending upon their Assets under Management and that only the direct plans have been included
How to Invest in ELSS
You can invest in Equity Linked Saving Schemes through either of the following ways-
- Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
- Identity Proof (Aadhar Card)
- Canceled cheque
- Passport size photos (around 4-5)
- PAN Card
- KYC documents (for KYC verification)
Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds (direct plans)- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment