ELSS, short for Equity Linked Savings Scheme, is an open-ended, diversified mutual fund scheme in India. Investments made in ELSS tend to serve the purpose of tax saving and generate returns on the invested amount in the long term.
Here’s what you should know about Equity Linked Savings Schemes :
- Equity Linked Savings Schemes are bound to invest a minimum of 80% of their assets in equities
- Out of all the tax saving investments, ELSS has the lowest lock-in period of 3 years
- Investors can continue to stay invested in the scheme even after the completion of the lock-in period
- ELSS offers higher interest rates than any Fixed Deposit or Public Provident Fund
- Investors can start investing in ELSS with an amount as low as INR500
- ELSS offers the option of investing monthly through SIPs
- Investments in ELSS tend to deliver investments proofs without any hassle
ELSS v/s other Tax Saving Options
Apart from ELSS, there are multiple other investment options such as long-term fixed deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), etc. that help investors save on taxes.
Read below to know why ELSS, amongst others should be your first choice if tax-saving is your major investment objective.
| Type of Investment | Lock-in Period | Returns | Taxation | Payment of investment amount |
| ELSS | 3 years | 12%-18% | Investments upto 1.5 Lakh are exempt from tax liabilities | Monthly deposits at fixed intervals are acceptable |
| FD | 5 years | 6.50%-8.25% | Interest on FDs is fully taxable | Only lump sum deposits are acceptable |
| PPF | 15 years | 8% | Investments upto 1.5Lakh are exempt from tax liabilities | Amount is to be paid in lump sum at the time of purchase |
| NSC | 5 years | 8% | Investments upto 1.5Lakh are exempt from tax liabilities | Amount to be paid in lump sum at the time of purchase of NSC |
| NPS | Till retirement | 10.81% | 60% of the corpus is taxable upon maturity | Amount to be paid in lump sum in the year invested |
Why ELSS for Tax Saving?
Section 80C of the Income Tax Act, 1961 makes ELSS eligible for tax deduction of up to INR1.5Lakh. Upon calculation, ELSS enables investors save a maximum of INR 46,800 in a year (with investments up to INR1.5Lakh). However, investments of more than INR1.5Lakh are not exempt from tax payments. The returns generated from ELSS over and above this amount are taxable with the Dividend Distributions Tax (DDT) and taxes on Capital Gains (LTCG).
Additionally, equity linked savings schemes offers the lowest lock-in period of 3 years, the lowest among all the tax-saving investment options. On top of this, ELSS are also known to offer the highest level of transparency, wherein investors can track their portfolio and make changes, wherever and whenever required.
Given that ELSS predominantly invest in equity instruments, the returns generated on ELSS investments are much higher than most of the other investment options. This offers twin benefits to the investors- (i) saving on taxes and, (ii) generating high returns. Hence, ELSS is considered an ideal investment for investors with a medium to high investment horizon.
It must be noted that investments in mutual funds are subject to market risks. Predominantly investing in equity and equity related securities, ELSS investments tend to carry a moderate level of risk. However, even though ELSS investments carry a higher level of risk in comparison to other fixed-return investment options, they have the potential to offer high returns and growth in the shortest lock-in period.