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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 mutual 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 installment 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 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 Type Short-term capital gains (less than a year) Long-term capital gains (more than a year) 
Equity-based funds 15% 10% (on gains above Rs.1 lakh)
Non – equity-based funds As per your tax slab 20% (after indexation)


Is it the best option?

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

Instrument/factors ELSS PPF National Pension System (NPS) FDs
Asset exposure Equity and equity-related instruments Government Bonds equities, government securities, corporate bonds, and other investments. (Variable) Banks
Lock-in period 3 years 15 years (partial withdrawal after 7 years) Until an individual turns 60 or retires

For tax saver FD – 5 years

            For regular FD – variable

Tax saving Up to Rs. 1.5 lakhs Up to Rs. 1.5 lakhs Up to Rs. 1.5 lakhs + Extra 50,000 Up to Rs. 1.5 lakhs
Tax implication LTCG (Long Term Capital Gain) tax for returns of more than Rs 1 lakh tax-free 60% withdrawn during retirement is tax-free according to your tax slab
Returns high average Above average Below average
Risks high average Above average low

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 the 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