ELSS - Equity Linked Saving Scheme

Equity Linked Savings Scheme is a tax saving mutual fund approved under the Income Tax Act. Under the scheme, through investment, an individual can save upto INR 1,50,000 in a financial year, under Section 80C of the Act. An equity-linked saving scheme, in short, is popularly known as ELSS. ELSS has caught up with other modes of investment over the past few years. However, their growing popularity has led to the availability of many misinformations. Through this article, we intend to educate the investors about the advantages and disadvantages of investing in ELSS funds.

Basic Features of ELSS

The basic features of ELSS scheme are as follows:

It is an equity-oriented investment
ELSS offers both growth and dividend options
Lock-in period under ELSS is of 3 years from the date of units allotment
After the lock-in period is over, the units are free to be redeemed or switched
Long term capital gain tax above INR 1,00,000 would be taxed at the rate of 10%
Investment under ELSS is more suitable for people who are looking at long term investment with tax savings
ELSS investment is bit risky as the returns are based on the equities which are volatile in nature

Advantages of ELSS

ELSS funds are most tax-efficient investment. The amount invested in an ELSS funds can be claimed as deduction under section 80C of the Income Tax Act. Compared to traditional tax-saving options like

Public Provident Fund (PPF)

, National Savings Certificate (NSC) and bank fixed deposits the lock-in period of an ELSS fund is much lesser. ELSS funds have a lock-in period of only 3 years, whereas, PPF investments have a lock-in period of 15 years, NSC investments have a lock-in period of 6 years and bank fixed deposits, eligible for tax deduction under section 80C of the Income Tax Act, have a lock-in period of 5 years. Thus as compared to all the other tax-saving investment options, ELSS has the least lock-in period. One can also opt for SIP investments. ELSS funds offer the best combination of a long term horizon and option to invest through SIP. ELSS funds will deliver good returns in the long run, since the same is an equity investment. In the long run, the investors will benefit from the power of compounding, which will give visibly higher yields in the later years.

Disadvantages of ELSS

If the investor has invested INR 5,00,000 in any financial year under ELSS, the investor can claim maximum deduction of only INR 1,50,000 under section 80C of the Income Tax Act. Further, INR 1,50,000 deduction under section 80C consist of many other allowable investment and if the investor has already invested more than INR 1,50,000 in other allowable investment than no tax benefit will be available to them for investing in ELSS. This can be said as one of the disadvantage of ELSS funds. Further, ELSS is not for risk-averse investors. ELSS investments are associated with stock market and hence all the risk associated with equity investment will affect ELSS funds. Hence ELSS investment is not for the person who is not willing to take risk. Another disadvantage of ELSS is that you cannot withdraw your funds before the maturity date. Other tax saving options like PPF and bank deposits permit premature withdrawal, subject to certain conditions.

Are Equity Linked Savings Schemes the Right Option For You?

Equity Linked Savings Scheme is a good option for investors who are willing to take certain risks and targeting higher returns through equity exposure. Further under ELSS investor can also invest through Systematic Investment Plan (SIP).

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Frequently Asked Questions

Common questions about ELSS.

An Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme approved under Section 80C of the Income Tax Act. It allows individuals to invest up to ₹1,50,000 per financial year and claim tax deductions on the invested amount.

ELSS funds have a lock-in period of 3 years from the date of allotment of units. This means that the invested amount cannot be withdrawn or redeemed before the completion of the 3-year period.

Some advantages of ELSS funds include tax benefits under Section 80C, a shorter lock-in period compared to other tax-saving instruments, the option for SIP investments, and the potential for higher returns due to equity exposure in the long run.

No, ELSS funds may not be suitable for risk-averse investors as they are equity-oriented funds and carry the inherent risks associated with stock market investments. ELSS funds are more suitable for investors with a higher risk appetite and a longer investment horizon.

No, you cannot claim tax deductions for ELSS investments exceeding ₹1,50,000 in a financial year. The maximum deduction allowed under Section 80C, which includes ELSS investments, is capped at ₹1,50,000.

No, you cannot withdraw your ELSS investment before the lock-in period of 3 years ends. Premature withdrawal or redemption is not allowed in ELSS funds.

If the ELSS fund units are held for more than 1 year, any long-term capital gains above ₹1,00,000 are taxed at 10%. However, if the units are held for less than 1 year, short-term capital gains are added to your total income and taxed as per the applicable tax slab.

Yes, ELSS funds offer the option to invest through a Systematic Investment Plan (SIP), which allows you to invest a fixed amount at regular intervals (e.g., monthly or quarterly).

ELSS funds have a shorter lock-in period of 3 years compared to PPF (15 years) and NSC (6 years). However, ELSS funds are riskier due to their equity exposure, while PPF and NSC are considered safer debt-based investments.

Yes, like other mutual funds, ELSS funds may have associated charges and fees, such as an entry load, exit load, and annual fund management fees. It's important to review the scheme's details and understand the associated costs before investing.