ELSS Funds – what are they, how you save taxes, and why invest in them?

Tax planning may seem like a tedious exercise requiring a lot of effort that may make an ordinary investor nervous at the first glance. Equity Linked Savings Scheme (ELSS) offers a simple way to get tax benefits and at the same time get an opportunity to gain from the potential of Indian equity markets.

What is ELSS?

Simply put, ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act and offers the twin advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years.

Why should one invest in an ELSS?

ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.

BEYOND TAX SAVING

Parameter PPF NSC ELSS
Tenure 15 years 5 years 3 years
Returns 8%* Compounded Annually) 8%* (Compounded
half-yearly)
Linked to equity markets
Minimum investments Rs.500 Rs.100 Rs.500
Maximum investments Rs.1,50,000 No limit** No limit**
Amount eligible for
deduction under Section 80C
Rs.1,50,000 Rs 1,50,000 Rs 1,50,000
Taxation for interest  Tax-free  Taxable Dividends and long-term capital gain tax-free
 Safety/ Rating  Highest  Highest  High Risk

*Current rate only. Interest rates are reset every quarter, linked to prevailing government security rates.

**There is no upper limit on investments. However, investments of only up to Rs.1,50,000 per year are allowed to be claimed as deductions under Section 80C of IT Act.

SHORT Lock-in

Instrument Lock-in Period
ELSS 3 Years from the date of allotment of the respective Units
Bank Fixed Deposit 5 Years
PO Time Deposit 5 Years
NSC 6 years
PPF 15 Years (Partial withdrawal after 6 years)

Source: Banks and Post Office

Pros and Cons

Like all investment options; ELSS too come with its share of advantages and disadvantages.

Advantages of ELSS over NSC and PPF

  • The main advantage of ELSS is its short lock-in period. The maturity period of NSC is 6 years and PPF is 15 years.
  • Since it is an equity-linked scheme earning potential is high.
  • Investor can opt for dividend option and get some gains during the lock-in period
  • Investor can opt for Systematic Investment Plan

Disadvantages of ELSS

  • Risk factor is very high compared to NSC and PPF

TAX ADVANTAGE

Particulars Without ELSS/ 80C Tax Saving Investment With ELSS / 80C Tax Saving
Investment
Gross Total Income Rs.7,50,000 Rs.7,50,000
Exemption Under Section 80C Nil Rs.1,50,000
Total Income Rs.7,50,000 Rs.6,00,000
Tax on Total Income Rs.77,250 Rs.46,350
Tax saved on Investment Nil Rs.30,900

Illustration of Tax exemption for a male person less than 60 years in receipt of salary income for the assessment year 2017-18 (FY 2016-2017)

Suitability

It is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Though there is no age to get started on an ELSS, it is a good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way.

^Source: http://finmin.nic.in, Rates incorporates compounding wherever applicable.
Disclaimer: The comparison of ELSS Vs other tax savings instrument has been given for the purpose of the general information only. Investment in ELSS carry high risk and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor.

 Content courtesy: SBI Mutual fund
 The data has been updated to reflect the current scenario.

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