HomeFINANCEELSS - Equity Linked Savings Scheme

ELSS – Equity Linked Savings Scheme

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.

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.

ParticularsAverage returnsLock in periodRisk involvedInterest/DividendRedemption proceeds
Tax Saving Fixed Deposits4%-6%5 yearsNo riskTaxable NA
Public Provident Fund (PPF)7% – 8%15 yearsNo riskTax freeTax free
National Pension Scheme (NPS)8%-11%Upto retirementMarket risk Tax freeNot entitrely tax free
National Savings Certificate (NSC)7%-8%5 years No risk TaxableTax free 
LIC 5%-6%15-20 years No risk NATax free
SIP 12%-15% No lock in Market risk TaxableTaxable 
ELSS15%-18%3 yearsMarket RiskTaxable Not entitrely tax free

Types of ELSS 

  1. 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.
  2. Dividend Payout – It can be further classified as:
    1. 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.
    2. 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.
ELSS

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.

Few FAQs

Q.  Is ELSS a mutual fund?
A. Yes, it is a type of mutual fund. The only difference being that no other mutual funds provide tax benefit u/s 80C.

Q. What if it is withdrawn before time? 
A. There is no way of premature exit. This means that investors cannot withdraw before three years.

Q. Can it be invested as SIP?
A. Yes, it can be invested as lump sum or SIP, that is, a small amount regularly.

Q. Is there any risk involved? 
A. Like all other equity-oriented funds, it depends on the performance of the securities in which the funds have invested. Therefore, it involves volatility risk, concentration risk, liquidity risk, and market risk.

Q. Can it be invested online?
A. It can easily be invested online with some minor formalities like KYC updation, PAN card requirement, etc. Click on the link, select tax-free, and easily invest online.

Q. How can it be withdrawn?
A. After 3 years, it can either be withdrawn lumpsum or through SWP which is a systematic withdrawal plan.

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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CA Preksha Lalwani
CA Preksha Lalwani
A Chartered Accountant by profession, Preksha has a flair for writing descriptive and educative financial articles. She strongly believes in the “Passion to believe, and compassion to achieve” ideology!

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