ELSS Funds (Tax Savings)

As per SEBI’s classification, ELSS mutual funds invest at least 80% of their total assets in equity and related instruments while offering tax benefits under Section 80C of the Income Tax Act, 1961. These funds have a mandatory lock-in period of 3 years.

Also, note the tax benefit is available only for individuals opting for the old tax regime.

In 2022, SEBI has allowed mutual fund houses to launch passively managed ELSS funds. However, an AMC can have either an actively managed ELSS or a passively managed ELSS fund.

Higher returns among Section 80C instruments

ELSS mutual funds are market-linked tax savings schemes that generate high returns in the long term. ELSS investments generate higher returns than traditional tax-saving schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), Tax Savings FD, etc.

Note: Government scheme interest rates are for the quarter Oct-Dec’23

Lower tax on gains

ELSS funds are taxed like equity mutual funds. Since they have a lock-in period of 3 years, the capital gains attract LTCG tax. Capital gains above Rs 1 lakh are taxed at 10%. 

On the other hand, interest from tax-saving FDs is added to your total taxable income and taxed as per the applicable income tax slab rate. 

Thus, when compared to tax savings FDs and some 80C instruments, ELSS have a better taxation policy. 

Lowest lock-in period among 80C instruments

One of the biggest advantages of ELSS funds is their low lock-in period. ELSS funds have the lowest lock-in period compared to other tax savings options under Section 80C.

Risk

Since ELSS schemes invest in equities, the fund portfolio is highly susceptible to market fluctuations. Almost all tax savings options under Section 80C offer guaranteed returns and thus carry minimum to zero risk. 

3-Year mandatory lock-in

ELSS schemes have a mandatory lock-in period of 3 years. Premature withdrawals, either fully or partially, are not accepted.

Well, the answer depends on the tax regime you choose. Yes, if you are filing taxes as per the old regime. 

And, NO, if you are filing taxes as per the new regime. The new tax regime doesn’t offer any tax exemptions. Also, because, historical data shows, ELSS funds have underperformed their benchmark and a mandatory a lock-in. You can rather divert the corpus towards other equity funds with a higher potential to generate better returns.

Speak to a financial advisor who will analyse your profile and portfolio and suggest whether ELSS funds are the right tax-saving instruments for you.

However, here are some situations where you can consider ELSS funds if you are opting for old tax regime:

Dual Advantage

ELSS mutual funds have the dual advantage of tax saving and wealth creation. Thus, your investments will potentially generate higher returns than traditional schemes under favourable market conditions.

Investing through SIPs

Investing a lump sum of Rs 1.5 lakhs to save tax can often become a burden for most investors.

SIPs in ELSS funds will help you invest small amounts regularly and automate your investments. With just a one-time bank mandate, you can automate your ELSS mutual fund investments.

Most tax savings schemes do not have an auto investment option. Thus, investing in ELSS funds is easy on the pockets as well as hassle-free.

Note: The above information is for educational purposes only. It is best to consult a financial advisor before making investment decisions.