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ELSS – Equity Linked Savings Scheme

Last Update Date : April 27, 2019
Estimated Read Time: 6 min

An individual or HUF can get tax exemption on the savings and their investments up to a maximum of INR 1,50,000 per annum. ELSS and various other investments are eligible for tax exemption under Section 80C of Income Tax Act, 1961.

Equity Linked Savings Scheme

What is ELSS?

Equity Linked Savings Scheme is kind of mutual funds that invest majorly in equity and equity-related securities. ELSS funds are approved for tax savings under Section 80C. Most of the tax savings investments have a lock-in period of 5 years, wherein you cannot withdraw funds in between. ELSS funds also has a lock-in period of three years which means you cannot withdraw the amount in between three years. These funds get matured at the end of three years of their investment date.

For example, you invest your savings in ELSS on 1 April 2017, you can withdraw the entire funds only on or after 2 April 2020. In case you stay invested beyond lock-in period i.e. more than three years, there are chances of gaining handsome returns on ELSS investments.

ELSS funds normally attract higher returns when the stock market is on the boom. Equally, these funds carry all those risks which are linked to investments in equity.

Why should you Invest in ELSS Funds?

Not only investments in ELSS, but also the returns received during the maturity (dividend) or at the time of maturity of the plan (Capital gains) is not taxable. The reason behind it is the three year lock-in period and there aren’t the long-term capital benefits on equity investments. Any equity investment, which is for more than one year is tax-free.

There are two options for ELSS funds, growth option and dividend option.

  1. Growth option: Under this option, an investor does not receive any periodic dividend instead he receives a lump-sum amount at the end of the lock-in period.
  2. Dividend option: Under this option, an investor does receive the amount at the end of the lock-in period; over and above, s/he is entitled to dividends during the lock-in period.

ELSS Tax Benefits

  1. Any investment up to Rs 1,50,000 can be claimed for tax deduction under section 80C.
  2. As compared to other tax savings investments like Public Provident Fund (15 years), bank fixed deposits (five years) and National Savings Certificate (six years), here, lock-in period of three years is much lower. Hence, you can get back your money back quicker on maturity, which is again tax-free.
  3. There is an encouraging factor for investors, under ELSS funds, to keep their amounts invested for a longer period in order to reap best returns on their investments.
  4. Both equity dividend and dividend received during lock-in period are tax-free incomes.
  5. In the last five years, under some ELSS investments, sometimes average ROI received by investors is 20% per annum. This results in high capital appreciation in a short time period.
  6. CRISIL – AMFI ELSS Fund Performance Index pursues to track the ELSS performance. In December 2016, as per this Performance Index, ROI on ELSS funds was 3.35% last year, 16.64% in the last three years, 17.71% in the last five years, and 10.61% in the last 10 years.

When should you not Invest in ELSS Funds?

ELSS funds provide all the above-listed benefits to an investor. However, these schemes are still facing hostility in the Indian investment market. The main reason behind it is growing inflation which is resulting in lower returns. People are hesitant to invest in ELSS since there is an investment risk associated with it if an investor fails to understand the volatility. As an investor, if you are afraid of savings in Equity Funds, you should rather opt for other tax savings investments over Equity Linked Savings Scheme. On the other hand, senior citizens or retired people who seek long-term investment schemes should try and avoid ELSS investments as a tax saving instrument.

ELSS vs Mutual Fund

ELSS fund is nothing but a type of mutual fund. There isn’t any major difference between investment in ELSS funds and investment in typical mutual funds. The only difference is the three-year lock-in period in ELSS fund.

Under ELSS investment scheme, an investor has to stay invested for the lock-in period, i.e. three years. Such investments cannot be liquidated prior to its maturity at the end of 3 years.

In case the main purpose behind investment isn’t tax benefit, an investor should prefer Equity Funds instead of ELSS funds which can be redeemed at any time since there is no clause related to lock-in period.

How to Invest in Elss?

Steps to invest in ELSS funds comprise of:

  • Choose the best ELSS: The returns offered under various ELSS funds are dynamic and highly differ from each other. Hence, select the best tax saving mutual fund scheme based on the analytical review of ROI and after considering the respective associated risk.
  • Opt for the best plan under ELSS funds: Each ELSS fund offers two subscription plans, regular plan and direct plan. The direct investment plan offers better ROI than the regular investment plan. So it is wise to invest in the direct plan. The gap between returns under the direct and regular plan is widening with each passing year.
  • Ensure you have linked bank account: To ease the direct credit of your dividends, you need to have a bank account (with the first name of yours) linked with your ELSS funds.
  • Opt for appropriate intermediary: No doubt, multiple options are available for mutual fund distributors or middlemen all over the country. These options are:
  1. Investments through mutual fund distributor, where paperwork on your behalf is done by them. Here, be careful about the plan you opt for. It should be beneficial for you, not for the distributor.
  2. Investment through an online distributor, where service providers like ICICI Direct, Kotak Securities, HDFC Securities, etc. offer their mutual funds’ scheme.
  3. You can also directly deal with the investment company. Here, you need to submit KYC details for easy investment process.

However, it is duly recommended to opt for an intermediary who eases your process and helps in managing your mutual funds. Here, you do not need to pay any commission to them since they are getting paid from the investment company they deal with.

Modes of Investment in Best ELSS Funds

Once you are sure how to invest in ELSS funds, the final stage in the investment procedure is to exercise the right option for you. You need to know which ELSS funds the best suit your requirements.

  1. SIP stands for the systematic investment plan. Here, your units are being bought periodically over time, at fixed intervals. Under SIP, you get an option to invest a fixed amount in a mutual fund at pre-defined consistent intervals. It is a disciplined investment plan and cost averaging help reduce the impact of market volatility. Over the period of time, SIP investments result in wealth creation for an investor.
  2. STP/SSP stands for systematic transfer plan / systematic switch plan. Here, an investor gets an option to provide approval to the Mutual fund to transfer a certain amount/switch (redeem) certain units from one scheme and invest in another scheme, from time to time. At consistent intervals, an investor can select amount/number of units that are transferred from one mutual fund scheme to another of his/her choice. Such facility helps in deploying investment funds at regular periods. Here, another benefit is that your funds are usually unaffected by any market volatility.
  3. SWP stands for the systematic withdrawal plan. Here, an investor gets an option to withdraw an entitled amount of money and units from the fund account at pre-defined regular intervals.

The advantage of a lump sum becomes prominent at times of a big market downfall in a bull market phase. An investor is aware of the market going to recover but when the fall happens, he is placed with an opportunity to buy Mutual Fund at an attractive NAV. So investing in one go will be beneficial here.

Difference Between SIP and Lump sum

Rohan invested a lump sum of Rs. 10 lacs in a fixed deposit for a period of 5 years at the rate of 8% p.a. At the end of 5 years, he got Rs. 14.70 lacs. On the other hand, Sohan grabbed an opportunity to invest a recurring deposit that offered 9% p.a. He invested a sum of Rs. 2 lac per year for a period of 5 years. Although the rate of return was higher, he ended up with Rs. 11.96 lacs.

Looking at ROI, Sohan got higher benefit whereas Rohan ended up with more money.

Whether SIP is better or Lumpsum is better is based on the time of entry in the market (bull market/ bear market), availability of funds, market trend, volatility in the market, etc. To get the most out of a Mutual fund, you can combine both SIP and Lumpsum in a way that will yield more profits to you.


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CA Shreya Oturkar
Shreya is a tax advisor at H&R Block (India) with intensive experience in SME taxation and audit. She holds an advanced post graduate qualification in accounting and is highly skilled in financial analysis and reporting. Apart from her professional achievements, Shreya is a talented artist with a flair for free-hand sketching!

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