Equity Linked Savings Scheme

  • ELSS (Equity Linked Savings Scheme) is a diversified equity scheme with a lock-in period of three years offered by mutual funds in India.
  • ELSS offers tax benefits under Section 80C of Income Tax Act 1961.
  • Both SIP (Systematic Investment Plan) and lump sum investment options are available for investing in ELSS.
  • ELSS has better liquidity compared to other options like NSC and Public Provident Fund due to its three years lock-in period.
  • Investing in mutual funds is subjective to fluctuations in the market.
  • There have been instances where the money invested in mutual funds remains the same or even lesser after 3 years.

What is ELSS Fund

  • ELSS (Equity-Linked Savings Scheme) is a mutual fund that invests primarily in the stock market or equity.
  • Investments of up to 1.5 lakhs in ELSS schemes are eligible for tax deduction under Section 80C of the Income Tax Act.
  • You can sell your ELSS investment only after three years from the date of purchase.
  • To maximize returns, it is recommended to keep your investments intact for the maximum duration possible.
  • ELSS SIP (systematic investment plan) has a lock-in period of three years for each installment, meaning each installment will have a different maturity date.

Working of ELSS Mutual Funds

  • ELSS (Equity-Linked Savings Scheme) funds are diversified equity funds that invest primarily in listed company stocks.
  • These funds choose stocks from across market capitalisation and sectors to maximize capital appreciation over the long run.
  • The fund manager conducts in-depth market research to pick stocks that deliver optimal risk-adjusted portfolio returns.
  • Investments made in ELSS funds are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
  • There is no upper limit to the amount that can be invested in ELSS, but a maximum of Rs. 1.5 lakh is eligible for a tax deduction as per the IT Act.
  • By investing this amount in ELSS, one can save up to ₹46,800 a year in tax outgo.

ELSS Mutual Funds: Suitable Investors

  • Salaried individuals who contribute towards the Employees’ Provident Fund (EPF), which is a fixed-income product, can opt for ELSS to generate higher returns on their investment portfolio.
  • ELSS provides good returns over the long term and is eligible for tax deduction under Section 80C.
  • ULIPs and NPS also offer tax benefits but have a higher lock-in period and lesser potential for returns.
  • ULIPs have a lock-in period of five years, while NPS is a retirement solution with partial exposure to equity, and the invested amount is locked until the age of 60 years.
  • ELSS funds have the shortest lock-in period of only three years.
  • ELSS is an ideal choice for first-time investors who want to experience equity investing and mutual funds while also availing tax benefits.
  • Equity investments carry higher risk, but the risk reduces over the long term (more than five years) due to the volatility involved.
  • Monthly SIPs in ELSS funds are the best way to start investing, as it helps accumulate more units when the market is low and generate good returns when the markets are favourable.

Key Considerations for Investing in ELSS Funds

  • When considering investing in a mutual fund returns, it’s important to compare its performance with its competitors and benchmark to determine if it has consistently beaten them in the past.
  • While no fund can always be at the top, good funds tend to appear in the top quartiles for extended periods of time.
  • When selecting a mutual fund, it’s important to consider the history of the fund house.
  • Look for fund houses that have consistently performed well over a long period of time, preferably five to 10 years.
  • The expense ratio of a mutual fund indicates the percentage of your investment that goes towards managing the fund.
  • Choosing a fund with a lower expense ratio can lead to higher take-home returns, making it a wise investment decision.
  • Standard deviation: Financial parameter reflects the volatility of the fund’s returns. Funds with higher standard deviations are riskier than those with lower deviations. Consider this parameter while selecting a fund.
  • Beta: It is a measure of the fund’s sensitivity to market fluctuations. Funds with higher beta have higher risks and offer higher returns. However, funds with lower beta are less volatile and more stable.
  • Sharpe ratio: This parameter indicates how much risk the fund has taken to generate returns. A higher Sharpe ratio suggests better risk-adjusted returns. Choose funds with a higher Sharpe ratio to maximise returns.
  • Qualifications and Experience: A fund manager should have the required qualifications and experience to manage the fund effectively. You can check the manager’s track record and credentials before investing.
  • Investment Philosophy: The fund manager’s investment philosophy should align with your investment objectives. For instance, if you prefer long-term investments, then a manager who focuses on short-term gains may not be a good fit.
  • Stability: A stable fund management team is preferable as it ensures continuity and consistency in the investment strategy. Check the tenure of the fund manager to assess the stability of the management team.

ELSS Funds with Strong Performance

  • Analyse and compare: The right way to choose an ELSS fund is to analyse and compare different parameters across funds before making a decision.
  • Individual factors: Investing in a fund depends on an individual’s financial goals, investment horizon, and risk appetite.
  • Top-performing ELSS funds: The following table lists the top-performing ELSS funds based on their returns over the past three years.
Fund Name3-Year Return (%)5-Year Return (%)
Quant Tax Plan Direct-Growth46.31%22.12%
Mirae Asset Tax Saver Fund Direct-Growth30.52%15.20%
Canara Robeco Equity Tax Saver Direct- Growth27.61%15.07%
Kotak Tax Saver Fund Direct-Growth29.50%14.34%
PGIM India ELSS Tax Saver Fund Direct-Growth31.15%13.39%

Benefits of Investing in ELSS Mutual Funds

Higher returns:

  • ELSS funds have the potential to offer higher returns in the long run as compared to other tax-saving investment options. The funds aim to create wealth while also saving taxes. On average, ELSS funds have generated 15% returns in the long term. This is significantly higher than the returns offered by other traditional tax-saving instruments.

Shortest lock-in:

  • ELSS has the shortest lock-in period of only three years. In comparison, tax-saving fixed deposits have a lock-in of five years, and the Public Provident Fund (PPF) has a maturity period of 15 years. This shorter lock-in period allows for greater liquidity and flexibility with your investment.

ELSS Category Average Rolling Returns (%)

  • ELSS Funds provide higher returns over the long term compared to most other tax-saving investment options, with an average return of 15% in the long term.
  • The category has generated the highest returns of over 21% in the 15-year period, calculated on a daily basis since the inception of tax-saving schemes.
  • ELSS funds serve the dual purpose of tax saving and wealth creation.
  • The top-performing schemes in the ELSS category have provided even higher returns than the average returns of the category.

Better Post-Tax Returns:

  • Long-term capital gains (LTCG) from ELSS mutual funds are taxed at only 10% if the total capital gain in the financial year of withdrawal exceeds Rs 1 lakh.
  • If the total profit in a financial year is less than Rs. 1 lakh, there is no long-term capital gains tax payable on ELSS mutual funds.


  • Convenience: ELSS mutual funds offer convenience through systematic investment plans (SIPs). With SIPs, you can invest a fixed sum each month in your preferred ELSS scheme, encouraging the habit of saving without requiring a large investment at the end of the fiscal year. You can invest in ELSS mutual funds within minutes using mutual fund apps such as ET Money, saving you the hassle of paperwork during the tax season.
  • Short lock-in period: ELSS has a lock-in period of only three years, making it a more liquid option compared to other tax-saving instruments such as tax-saving fixed deposits and PPF, which have a lock-in of five and fifteen years, respectively.
  • Higher returns: ELSS mutual funds offer higher returns than most other tax-saving investments in the long run. On average, ELSS funds have generated 15% returns in the long term, with the highest returns of over 21% in the 15-year period.
  • Better post-tax returns: If your total capital gain in a financial year of withdrawal exceeds Rs 1 lakh, the long-term capital gains from ELSS mutual funds will be taxed at only 10%. If your total profit in a financial year is less than Rs. 1 lakh, you don’t have to pay any long-term capital gains tax.
  • Equity exposure: ELSS funds provide a higher exposure to equity, potentially beating inflation and creating wealth over the long term. It is essential to invest based on goal requirements and asset-allocation suitability rather than just for tax purposes, and ELSS funds satisfy all three criteria.

ELSS Capital Gains Taxation

Capital gains from ELSS are treated in the same way as other equity instruments for income tax calculations.

  • Short-term capital gains (STCG) is taxed at a rate of 15%.
  • Long-term capital gains (LTCG) from ELSS is taxable only if the gains exceed Rs. 1 lakh during the financial year.
  • LTCG tax rate attracts a tax rate of 10% on the amount exceeding Rs. 1 lakh.

ELSS Investment Options

Growth option: With the growth option, there will be no dividends provided, and investors will only receive gains upon redemption. This allows for the appreciation of the total NAV, increasing profits. It is important to note that returns are subject to market risk.

Dividend option: This option provides benefits to the investor in the form of periodic dividends. It is important to note that dividends are taxable according to the investor’s tax slab. Moreover, dividends exceeding Rs 5,000 are subject to a 10% TDS (tax deducted at source).

Dividend reinvestment option:

  • This option allows investors to reinvest the dividends received from the fund into the same scheme, thus increasing the Net Asset Value (NAV) over time.
  • This option works well during an upswing in the market when the fund is expected to perform better.
  • Dividend reinvested is not paid out as cash, but it is reinvested in the scheme at the prevailing NAV.
  • This helps in compounding the returns over the long term.

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