ELSS is a tax savings investment scheme under section 80C of the Income Tax Act with the potential of offering the highest returns amongst all 80C investment schemes. In this article, we shall discuss the basics of ELSS, the benefits of investing in ELSS, its types, and its comparison with other tax savings schemes. Furthermore, we shall look into the taxability of ELSS proceeds and also discuss a few FAQs relating to it.
Table of Contents
Basics of ELSS
ELSS mutual fund is generally 65% equity-oriented that is, majorly shares. However, it also comprises debt securities that offer fixed income. It is a tax saving scheme under section 80C of the Income Tax Act and comes with a lock-in period of three years. It is the only tax saving scheme whose returns can compete with the ongoing inflations in the market as its returns depend on the performance of the securities in which the fund invests. In comparison with the other tax savings schemes, it is much more beneficial. We shall compare ELSS with other funds later in this article.
Benefits of Investing in ELSS
- Only mutual fund eligible for a tax deduction – up to 1,50,000/- a year.
- Lock-in period of 3 years – lowest of all other tax savings schemes.
- No maximum limit of investment. However, the minimum amount of investments varies according to the funds.
- Offers the highest amount of returns. In fact, highest amongst all the tax savings schemes. However, it does not provide guaranteed returns as it is based on the performance of the market.
- Dual benefits of savings and at the same time capital creation.
ELSS Vs Other 80C Investment Schemes
For those exploring alternatives to the traditional tax-saving schemes like PPF and EPF, the National Pension Scheme (NPS) presents a compelling option with potentially higher returns and flexible retirement benefits. As detailed in our blog “Is the National Pension Scheme Better Than PPF, EPF, and ELSS?”, NPS offers distinct advantages such as additional tax benefits under Section 80CCD(1B) which allows an additional deduction of up to ₹50,000. This is beyond the ₹1,50,000 deduction under Section 80C, making it an attractive investment for long-term retirement planning. Delve into the blog for a deeper understanding of how NPS stacks against other investment options in terms of returns, risks, and tax efficiency.
Section 80C provides various schemes to invest in to claim a deduction of a maximum of Rs 1,50,000 a year. All of them with their own advantages and disadvantages. The below table provides a brief comparison of the major investment schemes.
| Particulars | Average returns | Lock in period | Risk involved | Interest/Dividend | Redemption proceeds |
| Tax Saving Fixed Deposits | 4%-6% | 5 years | No risk | Taxable | NA |
| Public Provident Fund (PPF) | 7% – 8% | 15 years | No risk | Tax free | Tax free |
| National Pension Scheme (NPS) | 8%-11% | Upto retirement | Market risk | Tax free | Not entitrely tax free |
| National Savings Certificate (NSC) | 7%-8% | 5 years | No risk | Taxable | Tax free |
| LIC | 5%-6% | 15-20 years | No risk | NA | Tax free |
| SIP | 12%-15% | No lock in | Market risk | Taxable | Taxable |
| ELSS | 15%-18% | 3 years | Market Risk | Taxable | Not entitrely tax free |
Types of ELSS
- Growth-oriented – In this, the value of the fund is received only at the time of redemption, and no dividends are received during the life of the fund. It helps in wealth creation in the long run.
- Dividend Payout – It can be further classified as:
- Payout – According to this, dividends are received with the investor, which as per budget 2021 is added to the total income and taxed at the normal slab rates.
- Reinvestment – Dividends are paid but it is not received in the hands of the investor. Rather it is further reinvested as new units. Though they are not received still they are taxable at normal slab rates.
Tax Point of View
- 1. Capital Gain – Redemption proceeds are not entirely tax-free. Long term capital gain is taxed at the rate of 10% beyond the limit of Rs 1,00,000/-.
- 2. Dividends – Earlier the dividends received were tax-free in the hands of an investor. However, after Budget 2021, dividends received are added to the total income and are taxed at the normal slab rate of the assessee.
Conclusion
In comparison to other funds, ELSS has the potential to offer dual benefits that are tax savings and at the same time creation of wealth. Also, it offers returns competing with the market inflation rates. Despite the redemption, proceeds are not entirely tax-free, yet it appears to be the best investment plan amongst all 80C investment schemes. However, it is always advisable to seek professional opinion wherever necessary.
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FAQs on ELSS
ELSS is a tax-saving mutual fund scheme under Section 80C of the Income Tax Act, primarily investing 65% or more in equities. It offers the potential for high returns depending on market performance, along with a three-year lock-in period. ELSS is the only mutual fund eligible for tax deductions up to ₹1.5 lakh, combining tax savings with long-term capital growth.
ELSS offers several benefits, including tax deductions up to ₹1.5 lakh under Section 80C, a relatively short lock-in period of three years, and the potential for higher returns compared to other tax-saving instruments. It allows for unlimited investment, though returns are market-dependent. Additionally, ELSS combines the dual benefits of wealth creation and tax savings, making it an attractive option for long-term investors.
ELSS stands out among 80C schemes with an average return of 15%-18% and a lock-in period of just three years, compared to other schemes like PPF or Fixed Deposits which offer lower returns and longer lock-in periods. However, ELSS involves market risk, unlike guaranteed returns from PPF or NSC. Its flexibility and potential for high returns make it a preferred choice for those willing to take on more risk.
There are two main types of ELSS: Growth-oriented and Dividend Payout. In the growth-oriented type, returns are realized only upon redemption, helping in long-term wealth creation. The Dividend Payout type offers either regular payouts or reinvestments of dividends. While dividends were tax-free earlier, post-Budget 2021, they are added to the total income and taxed at the applicable slab rates.
ELSS proceeds are subject to tax in two ways: Capital gains and dividends. Long-term capital gains over ₹1 lakh from ELSS are taxed at 10%. Dividends, which were tax-free earlier, are now taxed according to the investor’s income tax slab rates. This change was introduced in Budget 2021, aligning the taxation of ELSS dividends with other income sources.
The lock-in period for ELSS is three years, the shortest among Section 80C tax-saving schemes. This period is significant because it allows for potential wealth accumulation while providing tax benefits. However, investors cannot redeem their investment during this period, making ELSS a medium to long-term investment option that combines tax savings with equity market exposure.
