ELSS Funds—How to Save Tax While Investing

Equity-linked savings schemes (ELSS) are one of the most preferred investment options to save tax under section 80C of the Income Tax (IT) Act. As the financial year-end draws closer and equity market sentiments being positive, you may see an increase in the investments in ELSS funds.

Tax planning is an important component of an overall financial plan. Section 80 of the IT Act provides several deductions from your taxable income, which reduces your liability. Taking advantage of this section to save taxes is recommended.

ELSS funds are diversified mutual funds that offer capital appreciation as well as tax advantages. Here are three features of such schemes.

  1. A majority of the accumulated corpus is invested in equities. Therefore, returns on these funds depend on the performance of the stock markets.
  2. When you invest in an ELSS fund, there is a minimum lock-in period of three years. You are unable to exit the scheme until the end of this duration.
  3. Returns earned on ELSS funds are tax-free and may be deducted from your gross annual income after the lock-in period.

You may either invest a lump sum or start a systematic investment plan (SIP) in an ELSS fund. A SIP investment may be as low as INR 500 and is beneficial because it does not result in a financial burden.Moreover, you may increase the amount as and when you want, giving complete flexibility. Additionally, you may discontinue the systematic plan or move your investment to another ELSS fund without any penalty or charges. However, if you invest through a SIP, you need to bear in mind that each installment is considered as a fresh investment. This implies that the three-year lock-in period is separately applicable to each SIPs installment.

Here are three benefits that ELSS funds have over other debt-related instruments like public provident fund (PPF), fixed deposits (FDs), and National Savings Certificates (NSC).

  1. Shorter lock-in

The lock-in periods for PPF, FDs, and NSCs are 15, five, and six years respectively. In comparison, ELSS lock-in period is only three years.

  1. Higher returns

The returns earned on traditional safe investment avenues are low; often below the increase in the rate of inflation. On the other hand, ELSS funds invest a majority of the corpus in equity and equity-related instruments. Therefore, such funds are able to deliver higher returns.

  1. Investment discipline

You may not regularly invest in NSCs or bank FDs. However, with a SIP in an ELSS fund, you may provide automatic debit instructions to your bank. Therefore, the pre-specified amount is invested on the particular date. This enables you to develop investment discipline through an automated process.

Tax benefits on ELSS investments

  • The capital invested in the funds is tax deductible under section 80C of the Income Tax Act up to an amount of INR 1.5 lakh per annum
  • Returns on ELSS funds are tax-free after the lock-in period

If you are willing to assume a slightly higher risk, ELSS funds are an excellent investment option. These funds not only provide tax benefits as mentioned but also deliver better returns.


Start investing in ELSS and save tax today.