What are Equity Linked Savings Schemes (ELSS) ?
While tax planning may seem to be a difficult process, Mutual Funds offer you a simple way to get tax benefits, while aiming to make the most of the potential of the equity markets.
An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.
How do deduction u/s 80C work?
When you invest in certain schemes like ELSS, Public Provident Fund, certain Bank Fixed Deposits etc. you can claim up to Rs.1,50,000 as a deduction from your gross total income in a financial year under Section 80C of Income Tax Act, 1961. The Table below will help further explain the how this works –
| Particulars | Without Tax Saving Investments u/s 80C | With Tax Saving Investments u/s 80C |
| Gross Total Income | Rs.7,50,000 | Rs.7,50,000 |
| Exemption u/s 80C | Nil | Rs.1,50,000 |
| Total Income | Rs.7,50,000 | Rs.6,00,000 |
| Tax on Total Income | Rs.75,000 | Rs.45,000 |
| Tax saved | Nil | Rs.30,000 |
Illustration of Tax exemption for an individual less than 60 years in receipt of salary income for the assessment year 2015-16. Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. Long-term capital gains from these funds are tax free in your hands and the lock-in period is only 3 years. Furthermore, you can also opt for a Dividend Payout option, thereby realizing some potential gain during the lock-in period, and also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.
Why should you invest in Equity Linked Savings Schemes ?
Along with the tax deductions, an ELSS offers you the following benefits:
- An opportunity to grow your money by investing in the equity market.
- Long-term capital gains from these funds are tax free in your hands.
- The lock-in period is only 3 years.
- You can also opt for a Dividend Payout option, thereby realizing some potential gain during the lock-in period.#
- You can invest through a Systematic Investment Plan and bring discipline to your tax planning
# However, it must be noted that any dividend payment will be from the NAV of the Scheme and therefore the NAV of the scheme will fall to the extent of dividend payment. Also dividend payment is subject to availability of distributable surplus and approval from Trustees.
Features of ELSS and other Tax Saving instruments u/s 80C of Income Tax Act, 1961 ?
| Particulars | PPF | NSC | ELSS |
| Tenure | 15 years | 6 years | 3 years |
| Returns | 8.70 % * (Compounded Annually) |
8.50 to 8.80 % * (Compounded half-yearly) |
Returns / Dividends are Market linked and not assured |
| Minimum Investment | Rs.500 | Rs.100 | Rs.500 |
| Maximum Investment | Rs.150,000 | No limit^ | No limit^ |
| Amount eligible for deduction u/s 80C | Rs.150,000 | Rs.150,000 | Rs.150,000 |
| Taxation for interest | Tax free | Taxable | Dividends and capital gain tax free |
| Safety/ Risk | Highest Safety | Highest Safety | High Risk |
| Lock-in Period | 15 Years – Partial Withdrawal after 6 years is permitted | 6 Years | 3 years |
*Source: https://finmin.nic.in – All rates shown above have been compounded wherever applicable. *There is no upper limit on investments. However, investments of only upto Rs.150,000 per year are allowed to be claimed as deductions under Section 80C of Income Tax Act, 1961.
Points to remember while choosing an appropriate ELSS
You must always remember to do thorough research when you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Also remember to look at the fund details like the fund manager’s investment approach, portfolio of the fund, the expense ratio of the fund and how volatile the fund has been in the past.
August, 2018
