What is ELSS and How to invest in ELSS Funds?

Equity Linked Saving Scheme or ELSS is an open-ended mutual fund scheme which comes with a mandatory lock-in period of three years. In ELSS, more than 80% of the assets are allotted to equities. ELSS is the only mutual fund scheme that comes under Section 80C of the Indian Income Tax Act of 1961.

Investors who are looking forward to saving taxes and at the same time, hoping to fetch some extra income through equity investments may invest in ELSS using an ELSS app. There are numerous Asset Management Companies selling ELSS products, and anyone who wishes to save tax by investing in a tax saving fund that invests in the equity market can opt for investing in ELSS.

What are some of the salient features of ELSS?

• ELSS has tax benefits: As stated earlier, ELSS is a tax saving mutual fund scheme. It comes under Section 80C of the Indian Income Tax Act 1961, where an investor can claim up to Rs. 1.5 lakhs* worth of deductions from their taxable income by investing in an ELSS scheme.

• ELSS has a short lock-in period: ELSS comes with a mandatory lock-in period of three years. Hence, ELSS investors cannot redeem their securities at least for three years. If the fund is performing well, investors may either choose to remain invested in their ELSS investment or choose to withdraw or sell their securities post-lock-in.
• ELSS funds may perform better in the long run: Though ELSS comes with a minimum lock-in period of 3 years, in case the fund is performing better, instead of withdrawing you may choose to stay invested for a more extended period of time. Historically, mutual funds have performed better when held for a longer period of time. Investors should bear in mind that mutual fund investments are subject to market volatility, and historical returns may or may not justify the fund’s current or future performance.

When can be the correct time to invest in ELSS?

Anytime might be an ideal time to invest in ELSS for anyone who is wanting to save taxes and increase their chances of earning some extra income. During tax season, investors flock at various tax saving schemes but aren’t able to choose the right one. ELSS may be considered as an investment option during the tax season because it not only allows investors to save tax up to Rs. 1.5 lakhs, but it also gives them a chance to earn some extra income.

What are some of the benefits of investing in ELSS?

• ELSS paves the way for the inculcating the habit of savings: One good thing about an ELSS fund is that an investor can start his/her ELSS investment with an amount as low as Rs. 500 per month. This is one way to understand the importance of savings because anyone can turn their savings into an investment. The discipline of regular savings may help an individual remain invested in their ELSS fund. 

• Invest in ELSS through Systematic Investment Plan: Systematic Investment Plan or SIP is a systematic approach towards an investment scheme. ELSS investments can be made systematically through SIP. With SIP, investors may instruct their respective banks to deduct a pre-determined amount every month and direct this amount to their ELSS investment. This way, investors can stay invested in their ELSS schemes in an easy and hassle-free manner.

To understand how ELSS might be used as a tax saving instrument, refer to the following example:

Sonam Abraham, a marketing manager with a reputed firm, earns an annual income of Rs. 12 lakh. That puts her in the 30% tax-slab. Sonam decides to make an annual investment of Rs. 1.50 lakh in an ELSS scheme. According to the 80C of the income tax act, this investment brings down Sonam’s taxable income to Rs. 10.5 lakh and translates into a saving of Rs. 46,800.

Any individual who hopes to save tax and has a long term investment objective may consider investing in a tax saving fund like Axis Long Term Equity Fund. This will allow him/her to invest up to 1.5 lakh rupees and claim tax benefit of up to Rs. 46,800*. Another advantage that ELSS has is that it has an incredibly short lock-in period. Thus, if the fund is performing well, investors may continue to stay invested in ELSS. Else, they may redeem their securities when their scheme matures and considering investing in another tax-saving scheme.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab. Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.