What is an ELSS Fund? Features, Benefits, and Tax-Saving Advantages Explained

An ELSS fund is an equity-oriented mutual fund with a mandatory lock-in period of 3 years. In recent years, taxpayers have favoured ELSS plans to avail tax benefits from equity investments. If you invest in an ELSS investment plan, you can avail of a tax deduction of up to Rs. 1.5 lakh in a financial year on the invested amount. Apart from the ELSS tax benefit on the invested amount, the gains from these schemes at the end of your three-year tenure will be considered as Long Term Capital Gain(LTCG) and will be taxed at 10% (if total gains during the financial year is above Rs. 1 lakh).

ELSS tax saving investments can be made in the same way you invest in any other mutual fund. You can invest in ELSS as a lump sum or via the SIP (Systematic Investment Plan) route.

SIP ensures financial discipline and decreases the risk to the investment through rupee cost averaging. Starting with investments as low as Rs 500 per month in an ELSS fund, investors can claim tax benefits of up to Rs 1.5 lakh in a financial year.

Some key features of ELSS Funds are:

• ELSS funds invest at least 80% of their portfolio in equity and equity-oriented investments
• They have a compulsory lock-in period of 3 years, which is the shortest amongst all tax savings instruments
• After completion of the lock-in, you can stay invested as long as you want as there is no maximum investment tenure.
• ELSS tax saving investments do not have any entry or exit load
• Good ELSS funds can generate returns between 10-12 percent in the long term, which is the highest in the tax-saving category of instruments. However, ELSS investment come with some risk as they are primarily invested in equities
• You enjoy dual advantages of long-term capital appreciation from investment in equity along with ELSS tax benefits
• Income that an investor earns under this scheme at the end of three-year tenure is considered Long Term Capital Gain(LTCG) and taxed according to the prevalent tax rules
• ELSS investment plans have a diversified equity portfolio as they invest in stocks of companies of various sizes and across multiple sectors
• You can enjoy tax exemption of up to 1.5 lakh in a financial year under Section 80C of the Income Tax Act 1961 by investing in ELSS mutual funds

Any individual who investments in an ELSS tax saving mutual fund can avail tax deduction of Rs 1.5 lakh in a financial year under Section 80C of the Income Tax Act 1961. Compared to other tax saving investment plans under section 80C like NSC or Public Provident Funds, ELSS offers the shortest lock-in period of 3 years.

Further, the returns that one gets by redeeming ELSS units are considered as long-term capital gain (LTCG), which is taxed at 10%, if total LTCG from equity investments in a financial year exceeds Rs. 1 lakh. So even individuals who comes under the maximum 30% income tax slab rate only have to pay up to 10% tax on the returns from an ELSS investment plan.

Any individual looking for tax deduction benefits and wants some good return while doing so can opt for ELSS investment plans. Some key features to consider when making ELSS tax saving investments are:

Before investing in the ELSS tax saving funds, you need to consider the following road maps.