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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.

  • 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.

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

  • 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.

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

  • 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: http://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.

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

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 (FY 2014-2015). 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.

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

Why should you invest in an 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.

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

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: http://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.

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