Equity Linked Savings Scheme (ELSS) Tax Saving Funds

Blog | Trading 101

Equity Linked Savings Scheme

A Mutual Fund is like a giant Vault, where each investor puts in a small amount of money in order to create a giant corpus. They mobilize different pools of money, and each such pool of money is called a mutual fund scheme. Additionally, investors invest in a mutual fund scheme whose investment objectives reflect their own needs and preferences. And one such type of mutual fund scheme is Equity linked Savings Scheme (ELSS).


What are ELSS schemes?

They are diversified equity funds that offer tax benefits to investors up to an investment limit of Rs. 1,50,000 a year. Consequently, this reduces their taxable income, and therefore tax liability. ELSS schemes are required to hold at least 80% of its portfolio in equity instruments and the remaining 20% in debt instruments. Moreover, the investor's investment is subject to a lock-in period of 3 years.

How to Invest in ELSS?

One can either opt for a lump sum payment or a Systematic Investment Plan, better known as a SIP. In a SIP, a fixed amount is deducted automatically from your bank account every month towards the ELSS. Moreover, one can set a SIP for as low as Rs. 500. As a result, this makes an ELSS easy to set up.

What are the advantages of ELSS over other schemes under section 80C?

As mentioned above, ELSS has a lock-in period of 3 years. Let us look at lock-in period of other schemes under section 80C in the below table :

Public Provident Fund(PPF) 15 years
Employee Provident Fund(EPF) Till the term of your employment say till 60 years
Tax Saving Fixed Deposits 5 years
National Savings Certificate 6 years

Suppose you want to invest Rs. 1 Lakh in an ELSS scheme. Assuming your equity investment grows at a rate of 15%, the total value at the end of 3 years would be 1.52 lakhs.

What are the disadvantages of investing in ELSS?

It can be a difficult task to decide which fund to invest your money in among a variety of funds. Additionally, there are no guaranteed returns, meaning the returns will based on how well the market performs. Consequently, there is no fixed return in a ELSS. Additionally, premature withdrawals are not allowed. You can only reap the benefits of your investment after the lockin period of 3 years has elapsed. As a result, the longer you hold, the better your returns will be.

Who is ELSS for?

ELSS is for those who are looking for an investment vehicle that is expected to return a high return on investment, provided they are willing to lock-in their money for at least 3 years.

So now that you know everything about ELSS, all you need to do is a bit of research before getting started investing in ELSS. 

In the age of decreasing rates on fixed deposits, ELSS is a great option to invest in and save on taxes at the same time.

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