If you want to reduce your taxable income while building long-term wealth, an ELSS fund (Equity Linked Savings Scheme) might be the most efficient option under Section 80C. ELSS combines the dual advantage of tax savings and equity market exposure, making it a popular choice for salaried individuals and first-time investors.
In this blog, weтАЩll explain why ELSS stands out among tax-saving instruments, how it works, its key benefits, associated risks, and how to get started, whether through SIPs or lump sum investments. Continue reading to learn more.
What is an ELSS Fund?
An ELSS fund is a mutual fund that primarily invests in equities (company shares) and offers tax-saving benefits under Section 80C of the Income Tax Act. These are the only mutual fund schemes eligible for tax deductions of up to тВ╣1.5 lakh in a financial year, making them a preferred option for salaried individuals and taxpayers.
How ELSS Works
When you invest in ELSS, your money is allocated to a diversified portfolio of stocks across large, mid, and small-cap companies. These funds are actively managed and aim for long-term capital growth. What sets ELSS apart is the mandatory 3-year lock-in period, which is the shortest among all Section 80C investment options.
During this period, you cannot redeem your investment. After three years, you can withdraw your entire investment or continue investing for further growth. Returns from ELSS are market-linked and taxed as long-term capital gains (LTCG) at 10% if your gains exceed тВ╣1 lakh in a financial year.
Key Features of ELSS Funds
Some key features of ELSS funds are:
- Tax savings: You can claim a deduction of up to тВ╣1.5 lakh under Section 80C, reducing your annual tax liability by up to тВ╣46,800.
- Lock-in period: ELSS funds have a fixed lock-in of three years.
- Equity exposure: At least 80% of the fund is invested in equities or equity-related instruments.
- There is no maximum investment limit. You can invest any amount, though only тВ╣1.5 lakh qualifies for tax deduction.
- Wealth creation: As market-linked instruments, ELSS funds aim to deliver inflation-beating returns over the long term.
- Diversification: Most ELSS funds invest across sectors and market caps, helping reduce concentration risk.
Benefits of Investing in ELSS
An ELSS fund (Equity Linked Savings Scheme) is one of the most efficient tax-saving investment options under Section 80C of the Income Tax Act. It helps you reduce your tax liability and offers the potential for wealth creation through equity market participation.
Some benefits of investing in ELSS include:
Tax Savings Under Section 80C
The primary reason why ELSS is popular among taxpayers is its tax benefit. You can claim a deduction of up to тВ╣1.5 lakh in a financial year under Section 80C, potentially saving up to тВ╣46,800 in taxes depending on your tax slab. This makes it a smart way to reduce taxable income while investing in a market-linked instrument.
Short Lock-In Period Compared to Other Tax-Saving Options
ELSS has a 3-year lock-in period, the shortest among all tax-saving instruments under Section 80C. In comparison, PPF has a 15-year lock-in, and tax-saving fixed deposits have a 5-year lock-in. This means ELSS offers greater liquidity while delivering tax benefits and long-term returns.
Potential for High Returns Through Equity Exposure
Since ELSS funds invest at least 80% of their portfolio in equities, they offer the potential for higher returns compared to traditional tax-saving tools like PPF or FDs. Over the long term, ELSS funds have historically delivered average returns of 10тАУ12%, driven by equity market growth and the power of compounding.
SIP and Lump Sum Investment Flexibility
You can invest in ELSS through a Systematic Investment Plan (SIP) or a lump sum. SIPs allow you to invest a fixed amount regularly, which is ideal for salaried individuals looking to build wealth gradually while maintaining investment discipline. There’s no maximum investment cap, and the minimum varies by fund.
How Does ELSS Compare with Other Tax-Saving Instruments?
When planning your tax-saving investments, comparing different options under Section 80C is important. While Public Provident Fund (PPF), Tax-saving Fixed Deposits (FDs), and National Pension System (NPS) are popular choices, ELSS funds stand out due to their shorter lock-in and higher return potential. HereтАЩs how:
ELSS vs PPF
- Type: ELSS is a market-linked equity mutual fund, while PPF is a government-backed fixed-return scheme.
- Lock-in: ELSS has a 3-year lock-in, compared to 15 years in PPF.
- Returns: ELSS offers market-linked returns (historically 10тАУ12%), while PPF currently offers 7.1% (subject to revision).
- Risk: ELSS carries market risk, while PPF is risk-free and government-guaranteed.
- Suitability: Choose ELSS if you’re comfortable with short-term market volatility and want to grow wealth. Opt for PPF if you prefer guaranteed returns and long-term stability.
ELSS vs FD
- Type: ELSS is equity-based; FD is a fixed-income product that banks offer.
- Lock-in: ELSS has a 3-year lock-in; FD requires a 5-year lock-in.
- Returns: ELSS is market-driven; FDs offer fixed returns (~6тАУ7%) but may not beat inflation.
- Tax on Returns: ELSS gains above тВ╣1 lakh are taxed at 10% (LTCG), while FD interest is taxed per your income slab.
ELSS vs NPS
- Type: ELSS is a mutual fund; NPS is a retirement-focused pension product.
- Lock-in: ELSS locks your funds for 3 years, while NPS matures at 60.
- Returns: ELSS returns are purely equity-based; NPS offers a mix of equity, corporate bonds, and government securities.
- Taxation: ELSS offers LTCG benefits. NPS withdrawals at retirement are partially tax-free, with the rest mandatorily used to buy an annuity (which is taxable).
Who Should Invest in ELSS Funds?
ELSS funds are a great choice for individuals looking to save tax while building long-term wealth. They offer a unique combination of equity exposure and tax benefits, making them suitable for a wide range of investors, such as:
First-Time Investors
ELSS is a good starting point if you’re new to mutual funds and want to experience equity investing with a mandatory holding period. It builds discipline through a 3-year lock-in and offers exposure to diversified equity portfolios.
Salaried Individuals
Salaried taxpayers looking to optimise their deductions under Section 80C can invest in ELSS and reduce their taxable income by up to тВ╣1.5 lakh. Investing via SIPs makes it easier to set aside a fixed monthly amount without affecting regular cash flow.
Tax-Saving and Wealth-Creation Seekers
If you want to save tax while growing your money, ELSS is one of the few investment options that aligns with both. Its market-linked returns offer higher growth potential than traditional tax-saving instruments like PPF and FDs.
Risks Associated with ELSS
While ELSS offers several advantages, knowing its risks is important before investing. These include:
Market-Linked Volatility
Since ELSS funds invest primarily in equities, they are subject to stock market fluctuations. The value of your investment can go up or down in the short term, especially during volatile market phases.
Not Ideal for Very Short-Term Goals
Due to the 3-year lock-in, ELSS is unsuitable if you need quick access to your money. Even beyond the lock-in, equity investments require a longer horizon to deliver consistent, risk-adjusted returns.
Things to Consider Before Investing in ELSS
While ELSS funds are attractive for their tax-saving benefits and growth potential, itтАЩs important to evaluate a few key aspects before investing:
Investment Horizon
ELSS comes with a mandatory 3-year lock-in, but you should ideally stay invested for 5 years or more for better returns. Equity markets may fluctuate in the short term, but long-term investing helps reduce volatility and build wealth.
Risk Appetite
Since ELSS funds invest primarily in equities, they are subject to market risk. Investing in ELSS can be rewarding if you can tolerate short-term ups and downs and have a long-term view. However, if youтАЩre risk-averse or need guaranteed returns, other Section 80C options like PPF may be more suitable.
Fund Performance History
Before choosing an ELSS fund, review its past performance, consistency during market cycles, and the fund manager’s track record. DonтАЩt rely only on short-term returns тАФ instead, look at 5-year and 7-year performance for a better picture.
How to Invest in ELSS Funds
Investing in ELSS is simple and can be done both online and offline. Here’s how:
Online and Offline Modes
You can invest in ELSS through mutual fund apps, online brokers, or directly via AMC (Asset Management Company) websites. You can approach fund houses or distributors offline, but online platforms are faster and more convenient.
Through AMC Websites or Brokers
If you prefer a DIY approach, visit the AMC’s official website and complete your KYC (Know Your Customer) process to start investing. Alternatively, you can invest through registered mutual fund brokers offering guidance and portfolio tracking.
SIP vs Lump Sum: What to Choose?
- SIP (Systematic Investment Plan) is ideal if you want to invest a fixed amount monthly. It builds discipline and averages out market volatility.
- The lump sum is suitable if you have surplus funds and want to invest in one go, especially during a market dip.
For most salaried investors, SIP in ELSS is a practical choice as it aligns with regular income and budget planning.
Conclusion
An ELSS fund offers more than tax deductions тАФ it helps you participate in the equity markets with a disciplined, long-term approach. With a short lock-in period, flexible investment options, and the potential for inflation-beating returns, ELSS is a smart fit for investors to balance tax efficiency with growth.
Try the Appreciate app if youтАЩre ready to invest in ELSS and want a simple, trustworthy platform. From guided fund selection and one-tap investing, Appreciate gives you everything you need to make smart investment decisions тАФ all in one place. Download the app now!
FAQs
What is the full form of ELSS?
The full form of ELSS is Equity Linked Savings Scheme. It is a Tax-saving fund that primarily invests in equities and offers tax benefits under Section 80C of the Income Tax Act.
Why should I choose ELSS over other tax-saving instruments?
ELSS funds offer the shortest lock-in period of 3 years and the potential for higher returns due to equity exposure. Unlike traditional tax-saving options like PPF or FDs, ELSS gives you the benefit of both tax savings and long-term wealth creation.
Is ELSS a safe investment option?
ELSS is market-linked, so it carries some risk due to equity exposure. However, it can deliver higher, inflation-beating returns over the long term. It suits investors with a moderate to high risk appetite and a longer investment horizon.
What is the lock-in period for ELSS funds?
All ELSS funds have a mandatory lock-in period of 3 years, the shortest among all tax-saving investments eligible under Section 80C.
Can I withdraw ELSS before 3 years?
No, you cannot withdraw from ELSS before 3 years. Premature redemption is not allowed. You can only redeem or switch your investment after the lock-in period ends.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
