What is ELSS and how to invest in ELSS?

What is an ELSS?

An Equity Linked Savings Scheme (ELSS) is a diversified, open-ended equity mutual fund that helps investors save taxes under section 80C of the Income Tax Act, 1961, in India.

ELSS provides investors with the opportunity to save taxes of up to ₹1.5 lakh per financial year under section 80C, while the invested amount keeps compounding by getting exposure to the equity market.

Thus, ELSS offers investors something that traditional tax-saving investment instruments such as fixed deposits (FDs) and Public Provident Fund (PPF) do not: the convenience of saving taxes potentially with higher returns through equity market investments.

A primary reason for the popularity of ELSS is that it combines efficiency for saving taxes, while giving the opportunity of superior, market-linked returns. ELSS long-term capital gains are exempt from paying taxes for investors, which is an even greater combination of tax savings and growth potential for investors.

Who Can Invest in ELSS?

Individual taxpayers and Hindu Undivided Families (HUFs) can invest in ELSS. The minimum amount to invest can be as little as ₹500, making it suitable for students, part-time workers and first-time investors.

If you are an investor who prefers the combination of wealth generation over a long period of time, along with a potential tax benefit, ELSS provides a perfect combination for you. There is no limit on how much an investor can invest. However, the tax benefit is capped at ₹1.5 lakh per financial year.

Investors can invest in a lump sum or via a Systematic Investment Plan (SIP), which allows them to invest a small amount regularly.

How to Invest in ELSS

Investing in ELSS is straightforward and can be done either through:

Mutual fund companies directly through their websites or through investment platforms like Upstox, which provide mutual fund investment options.

Before investing, it is worthwhile to assess your risk appetite, fiscal requirements and performance of the ELSS fund you are considering.

It is also beneficial to stay invested beyond the three-year mandatory lock-in period to maximise returns from market cycles and compounding.

While ELSS can produce high returns over the long term, it is important to consider the risks associated with equity markets as well as inflation risks impacting returns.

Why ELSS Stands Out Among Tax-Saving Options

ELSS has a distinct advantage over other Section 80C instruments, like National Savings Certificate (NSC), Public Provident Fund (PPF), or Tax-Saving Fixed Deposits, given its shorter lock-in period and comparatively higher returns.

For example, most traditional instruments require an investor to be locked in for five years, or possibly longer, whereas ELSS only requires a lock in of three years. For this reason, ELSS is a more appealing option for investment for young professionals and salaried individuals.