101 Guide to ELSS Mutual funds

Harsh Jain
August 25, 2022
ELSS mutual fund- tax saver
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Remember the time when you were told that investing in a Public Provident Fund (PPF) was the only available option to save tax and invest simultaneously? Well not anymore. There are plenty of options to do that now and one of them is through an ELSS Mutual Fund.

What are ELSS mutual funds?

ELSS Mutual Funds or Equity-Linked Savings Scheme is a type of equity mutual fund scheme that allows you to save tax under section 80C of the Income Tax Act while investing for your long-term goals.

Section 80C of the IT Act permits tax deduction of up to Rs. 1,50,000 per financial year under different investment instruments.

How to identify an ELSS Mutual Fund?

  • A tax deduction of up to Rs. 1,50,000 on your invested capital every year.
  • A lock-in period of 3 years – you cannot take your investments out of any ELSS funds before 3 years from the inception of your investment in the fund (every SIP instalment is locked in for a period of 3 years also)
  • Allocation of most of the fund’s value in equity and equity-linked instruments.
  • You can invest as high of an amount as you want although the tax rebate will be up to Rs. 1.5 lakhs only

Taxation of an ELSS Mutual Fund

ELSS Funds are taxed just like other equity-based funds. Details in the table below:

Fund TypeShort-term capital gains (less than a year)Long-term capital gains (more than a year) 
Equity-based funds15%10% (on gains above Rs.1 lakh)
Non – equity-based fundsAs per your tax slab20% (after indexation)

Is it the best option?

Here’s us comparing ELSS mutual funds with other similar investment instruments

Instrument/factorsELSSPPFNational Pension System (NPS)FDs
Asset exposureEquity and equity-related instrumentsGovernment Bondsequities, government securities, corporate bonds, and other investments. (Variable)Banks
Lock-in period3 years15 years (partial withdrawal after 7 years)Until an individual turns 60 or retiresFor tax saver FD – 5 years

For regular FD – variable

Tax savingUp to Rs. 1.5 lakhsUp to Rs. 1.5 lakhsUp to Rs. 1.5 lakhs + Extra 50,000Up to Rs. 1.5 lakhs
Tax implicationLTCG (Long Term Capital Gain) tax for returns of more than Rs 1 lakhtax-free60% withdrawn during retirement is tax-freeaccording to your tax slab
ReturnshighaverageAbove averageBelow average
RiskshighaverageAbove averagelow

The inference we can take out from this comparison of tax-saving instruments is that ELSS has an acutely lower lock-in period but is subject to market risks, unlike other safer options.

How to invest in an ELSS Mutual fund?

  • Like every other Mutual Fund scheme, you can either invest lump-sum or through SIP. Most people tend to wait until the tax filing season to invest a lump sum but we recommend that if you are new to investing – you should spread out your investments via a SIP.
  • Also, similar to other Mutual Funds you have options to either choose the Growth plan wherein the profits generated by the fund are reinvested back into the fund and get the lump sum after the lock-in period (if you wish to!), or the Dividend plan that provides you with regular dividend payouts (although the dividends are not guaranteed and are at the sole discretion of the fund house)

Some FAQs 

Where is my invested money going?

A: A minimum of 80% of the total fund’s assets are to be invested in equity and equity-related instruments.

Is it mandatory to take out our investments after 3 year lock-in period?

A: No, you can stay invested for however long you want but the minimum amount of time before you can redeem is 3 years.

Is ELSS meant for me?

A: Considering you have a risk appetite for equity markets, it is a good fit for your portfolio as it can provide higher returns over all of the available options

What is the right time to invest in ELSS?

A: You just cannot time the market. As the saying goes, the best time to enter the market was yesterday – the second best time is now.

How can Daulat help you? 

A: Our experts here at Daulat go through a whole host of factors before constructing a portfolio. Reach out to us if you want to have an ELSS portfolio constructed for you.

Risk Assessment Test