ELSS Funds
Equity Linked Saving Scheme (ELSS) is a tax saver mutual fund that enables investors to save tax with the lowest lock-in period among tax-saving investments. You can invest in these funds to generate wealth and earn a stable income for your long-term financial goals.
Higher returns than other tax-saving options
Tax deductions up to Rs. 1,50,000 per year
Portfolio diversification
Lock-in period of 3 years
What are ELSS Tax Saver Funds?
In this category of mutual funds, 80% of your investments will go to equity and its related instruments. And to offer your additional benefits, this fund category comes with a lock-in period of three years. When you opt-in for this investment category, you become eligible for deductions under Section 80C of the Income Tax Act.
List of Best ELSS Funds to Invest Today
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Benefits of Investing in ELSS Funds
Tax Benefits
Save up to Rs. 1.5 lakh per financial year, under long-term capital gains (LTCG) from ELSS funds. You can lower your taxable income by making a mutual fund investment thanks to tax deductions offered under Section 80C of the Income Tax Act, 1961.
Potential for Higher Returns
ELSS funds primarily invest in equities, which have historically delivered relatively better returns compared to traditional tax-saving options like PPFs or FDs. The long-term growth potential of ELSS funds is substantial, especially when held over the long term.
Systematic Investment Plan (SIP)
You can invest in ELSS funds through SIP, which allows them to invest a fixed amount of money at regular intervals, helping to average out the cost of investment and mitigate market volatility.
Who Should Invest in ELSS Funds
Tax Savers Looking for High Returns
ELSS funds offer the dual benefit of tax savings under Section 80C of the Income Tax Act and the potential for high returns through equity investments. Investors aiming to save on taxes while seeking higher returns compared to traditional tax-saving instruments like PPF or NSC should consider ELSS funds.
Long-Term Investors with High Risk Appetite
Since ELSS funds primarily invest in equity markets, they are suitable for investors with a long-term investment horizon and a high tolerance for market volatility. Those who can stay invested for at least 3-5 years to ride out market fluctuations and potentially earn substantial returns should opt for ELSS funds.
First-Time Equity Investors
ELSS funds are an excellent starting point for first-time investors looking to enter the equity market. The mandatory 3-year lock-in period not only helps inculcate a disciplined investment habit but also provides a reasonable timeframe to understand the market dynamics and experience the benefits of equity investments.
Tax Relaxations with ELSS Funds
You will have tax benefits when you file your ITR at the end of the financial year, just because you have ELSS funds in your investment portfolio, know how:
- When you are an ELSS investor, you can deduct up to Rs 1.5 lakh in taxes under Section 80C of the Income Tax Act of 1961. This can result in a maximum tax savings of up to Rs 46,800 annually.
- ELSS fund gains are taxed as long-term capital gains because withdrawals are permitted only after a three-year lock-in period. These gains are taxed at 10% for long-term capital gains, with profits under Rs 1 lakh exempt.
LTCG in ELSS Funds
Long-term capital gains (LTCG) in ELSS (Equity Linked Savings Scheme) funds refer to the profits earned from the sale of equity-oriented mutual fund units held for one year or more. The LTCG tax is applicable on gains exceeding Rs. 1 lakh in a financial year, and the rate of taxation is 10%.
Suppose Arun invested Rs. 5 lakh in an ELSS mutual fund scheme on May 3, 2018. On June 4, 2021, he redeemed all the units at Rs. 8 lakh. During the 3-year lock-in period, his investment generated a profit of Rs. 3 lakh.
| Step | Calculation | Result |
| 1. Calculate the profit | Rs. 8,00,000 - Rs. 5,00,000 = Rs. 3,00,000 | Rs. 3,00,000 |
| 2. Calculate the LTCG | Rs. 3,00,000 - Rs. 1,00,000 = Rs. 2,00,000 | Rs. 2,00,000 |
| 3. Calculate the LTCG tax | Rs. 2,00,000 x 10% = Rs. 20,000 | Rs. 20,000 |
In this example, Arun has to pay a long-term capital gains tax of Rs. 20,000 (10% of Rs. 2,00,000) on the LTCG from his ELSS investment.
Frequently Asked Questions
This mutual fund helps you save taxes by locking your investment amount for a minimum of three years.
Based on 5 year returns, the best ELSS funds to invest are:
| S.no | Fund Name | 5 Year Returns (Annualized) |
| 1 | Quant ELSS Tax Saver Fund Direct Growth | 35.44% |
| 2 | SBI Long Term Equity Fund Direct Growth | 24.88% |
| 3 | Motilal Oswal ELSS Tax Saver Fund Direct Growth | 24.35% |
| 4 | DSP ELSS Tax Saver Fund Direct Growth | 22.98% |
| 5 | Bandhan ELSS Tax saver Fund Direct Growth | 22.70% |
Since ELSS Funds are equity funds i.e. they invest in stocks of companies, you need to stay invested for at least 5 years.
There is no cap on your ELSS investment amount, but the tax benefits are available up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.
Yes, ELSS funds are high-risk investments and come with the potential for high returns, as 80% of your investment goes into equity-related instruments.
The full form of ELSS Funds is "Equity Linked Savings Scheme.
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