Equity-linked Saving Scheme (ELSS) is a category of mutual fund that the government created to encourage long-term investing in equity. In order to do improve equity participation the government allowed investment in equity based mutual funds to be tax deductible through ELSS schemes. By offering a tax deduction, the average citizen is encouraged to invest a larger part of their savings in equities. Investing in an ELSS can benefit an investor in multiple ways.
Amongst all the tax savings schemes this is the only one which gives the proper feel of pure equity. Even though ELSS has some risk involved, but with minimal lock in period, it has emerged as the most attractive tax saving vehicle today.
However, you should know a few important things before you invest in ELSS. Here are the 6 things that you must know about ELSS :
In this article
- 1. What is ELSS ?
- 2. What are the key features of ELSS ?
- 3. How ELSS acts as a tax saving instrument?
- 4. What is the lock-in period for ELSS?
- 5. What is the amount range for investment in ELSS?
- 6. How are ELSS mutual funds when compared to other tax saving options under section 80c?
- 7. What are the different ways to invest in ELSS?
- 8. How to Choose the right ELSS fund?
- 9. Tax on Capital Gain from ELSS Funds
- 10. Should you redeem after the Lock in Period of ELSS Ends
- 11. Should I invest in Growth or Dividend ELSS Fund ?
- 12. What is there for ELSS in Union Budget 2018?
- 13. Best option for start investing in stock market
- 14. How risky are ELSS funds ?
- 15. What are the best ELSS funds for 2018 ?
1. What is ELSS ?
ELSS is a dedicated mutual fund scheme that allows investors to save tax. It also provides an opportunity for long term capital appreciation.
An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.
2. What are the key features of ELSS ?
Key features of a ELSS Fund :
- Surrogate route to direct stock markets
- Tax saving instrument
- Three year lock-in period
- Can be held even after the completion of three years
- Offers dividend as well as growth options.
- Lower minimum investment option.
- One can invest in small amounts through SIP
- Potential to deliver higher returns on investment.
3. How ELSS acts as a tax saving instrument?
Tax planning or income tax savings are an integral part of investing and overall financial planning that helps in a bid to maximize wealth. Tax planning in India involves the selection of the right tax saving instruments and making proper investments.
One of the key sections under which individuals can save tax is Section 80c of the Indian Income Tax Act. Under this section, investments up to ₹ 1,50,000 per annum are eligible for deduction from your taxable income.
The investment made will give you tax benefits only for that financial year.If you invest ₹ 1.5 lakh in the financial year 2018-2019, you will get tax benefits in the financial year 2018-2019.
The money invested that year will continue to remain locked-in for 3 years from the date of investment. Investing more than ₹1. 5 lakh in 2018-2019 will not give you any benefits in the next financial year.
Only ELSS Mutual Funds offer tax benefits under section 80c of the Income Tax Act. As per this section, one can avail tax exemptions up to ₹ 1,50,000 by investing in ELSS funds.
4. What is the lock-in period for ELSS?
The lock-in period of ELSS mutual funds which are allowed to be claimed as a deduction under Section 80C is 3 years. In other words, these mutual funds cannot be sold before 3 years.
If you are investing in ELSS through SIP, each installment can be redeemed after 3 years in a similar fashion. For example: Say you bought units of ELSS mutual fund in January 2017 then it can be sold only after January 2020, not before that.
The lock-in period of ELSS is the least when compared with the 5 year lock-in period of the other popular tax saving instruments like PPF Account, National Savings certificate, Tax Saving Fixed deposit.
5. What is the amount range for investment in ELSS?
The minimum amount of investment is ₹ 500. There is no maximum limit for the investment. But to claim tax deductions under 80c only a maximum of ₹ 1.5 lakhs can be invested in it. You can do the investment as a lump sum or through a systematic investment plan (SIP).
6. How are ELSS mutual funds when compared to other tax saving options under section 80c?
These are several tax saving options available to get tax benefit under Section 80c. Here is the comparison between popular tax saving instruments:
|Risk Profile||Interest||Guaranteed Returns||Lock-in Period|
|12-15 % expected||No||
|8-10 % expected||No||
|7-9 % expected||Yes||
|8-10 % expected||No||
As seen in the table above, investing in ELSS mutual funds has several advantages over investing in other investment options under section 80c in terms of return on investment and lock-in period.
7. What are the different ways to invest in ELSS?
ELSS gives 2 options for investments. First through a lump sum or second through Systematic Investing Plan (SIP).
A lump sum is a single large investment done by an investor in one go.
A SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular interval. It is similar to regular saving schemes like a recurring deposit.
It is one of the best ways to invest and tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long horizon.
Investing periodically also spreads the burden and makes a good investment habit. You can invest in ELSS without any paperwork on Groww.
8. How to Choose the right ELSS fund?
To select the right ELSS, which matches your investment goals, you have a look into following aspects of ELSS :
Make sure the mutual fund is an ELSS fund
You will get tax deductions under Section 80c only if the mutual fund is an ELSS fund. Other mutual fund schemes do not provide benefits under section 80c of the Income Tax act.
Look into the past performance
Past performance is no guarantee of future performance. Most people start with this step but they stop here too. Looking at returns is only the start of evaluating a fund.
It helps to gauge the performance of fund managers along with the fund performance over the years.
Age of ELSS Fund
It is best for new investors to invest in funds that are more than 5 years old as these funds have a reputation and track record to look up to.
Risk of ELSS
The risk level of ELSS is very important to select the fund which is aligned to your risk appetite. Different ELSS available in the market for different risk takers.
The expense ratio is the percentage of the fund that the asset management company takes annually as a charge for all operations of the fund.
An expense ratio that is too high is usually not a good sign.
Asset Management Company (AMC)
This is the company managing the mutual fund. Mutual funds are almost always named after the AMC that manages them. Better to look for fund performance rather selecting it based on AMC reputation.
Asset Under Management (AUM)
This refers to the amount of money being managed by an individual mutual fund. Different types of ELSS Fund have a different ideal size for AUM.
Simpler method: Rating of ELSS Fund
If all of the above methods seem very tedious and intimidating to you, there is a simpler way to choose a mutual fund. Use the rating of a ELSS fund to know which fund is the best.
9. Tax on Capital Gain from ELSS Funds
ELSS funds are equity mutual funds. Capital gain tax on ELSS funds are same as in equity mutual funds.
If you sell your equity mutual funds after a year, the returns will qualify for long-term capital gains tax. Long-term capital gains (LTCG) tax is nil on equity fund till 31st March 2018. But Finance Minister Mr. Arun Jaitley, in his Union Budget 2018 speech on 1st February 2018, re-introduced LTCG tax on stocks.
Investors will have to pay 10 % tax on profit gains exceeding ₹ 1 lakh made from the sale of stocks or equity oriented mutual fund schemes held for over one year.
If you sell your equity mutual funds before a year, you will have to pay short-term capital gains tax of 15 per cent on your returns.
ELSS funds are locked in for 3 years. Thus, the gains on them automatically comes under long term capital gain tax. Though you can redeem it before also.
10. Should you redeem after the Lock in Period of ELSS Ends
ELSS is a dedicated mutual fund scheme that allows investors to save tax. It also provides an opportunity for long term capital appreciation. So, if ELSS is performing well and is at par to your investment goals then don’t redeem it.
But it is not meeting your investment expectations and there are better funds available in market in same category then redeem and invest in better funds. 3 years is a long time, and market may behave totally different in that span of time.
So, it is not mandatory to redeem after the three-year lock-in period ends.
11. Should I invest in Growth or Dividend ELSS Fund ?
If you choose the Growth option it ensures compounding your capital in the mutual fund invested. The final amount can be redeemed once at the end of the lock-in period.
But, the dividend option gives you some amount for various periods of time. It offers some liquidity even during the lock-in period. This dividend paid out can be further invested in other mutual funds depending on the investor’s portfolio or re-invested back into ELSS Fund.
The dividend received by the investors from these mutual funds is tax free in the hands of the investors.
12. What is there for ELSS in Union Budget 2018?
Investments in ELSS continue to qualify for tax deductions of up to ₹ 1.5 lakh under Section 80c of the Income Tax Act. These funds come with a mandatory lock-in period of 3 years in order to get tax-free returns.
However, after the re-introduction of LTCG tax in the Union Budget 2018 , returns from the investments in ELSS funds would be taxed. Long-term capital gains from equity mutual funds above ₹ 1 lakh would be taxed at 10 percent without any indexation benefit.
After the budget, LTCG tax has been discussed a lot of among investors. There is a lot of scepticism around it. Some investors think that ELSS has lost its benefit of tax because it will also be chargeable under LTCG tax.
Experts say that many direct investors who were planning to invest in ELSS are now getting confused and are considering their investment options. This doubt will definitely hit the last minute investors who were planning to make some extra returns and save taxes in ELSS.
But many experts believe that this new LTCG tax, will have a short-term sentimental impact, investors will adjust to this new tax regime keeping in mind that equity investments have yielded good returns over the long-term.
However, obviously a 10 % tax has been levied on the capital gains which was not there earlier, so will definitely hurt the ELSS investors. But our stock market has become matured enough over the last couple of years, to attract the foreign and retail investors.
Also, significantly pointed by many experts, the 10 % tax on LTCG is a subsidized rate.
13. Best option for start investing in stock market
Even if you have never invested in equity mutual fund schemes, you should consider investing in ELSS funds. Many mutual fund advisers believe that it is the ideal investment to get into the world of equity mutual fund schemes.
Since these schemes come with a mandatory lock-in period of three years, investors would get used to the volatility typically associated with the stock market. Once they get a hang of it, many investors start investing in other equity mutual fund schemes.
14. How risky are ELSS funds ?
Many new investors often get scared when they learn that ELSSs invest mostly in stocks and carry a higher risk. However, you can overcome this if you are prepared to stay invested for a long period.
Countless studies prove that one can beat volatility and make superior returns from stocks by staying invested for a long period. You should remind yourself that equity has the potential to offer superior returns than other asset classes over a long period.
ELSS fund does not offer guaranteed returns, as returns you get are market linked. Since your investment will be locked in ELSS for 3 years, you benefit by staying invested for long periods of time. Lock-in period in ELSS helps you grow your money by staying invested in the market and not selling, during sudden falls in the stock market.
However, looking at the past trends among ELSS funds, you can expect a return of between 12-15 % annum on your investment.
15. What are the best ELSS funds for 2018 ?
ELSS funds are one of the best investment options for tax savings. These are the best ELSS funds available in market :
Aditya Birla Sun Life Tax Relief 96 Fund is one of the well-performing Equity Linked Savings Scheme (ELSS) funds in the market today.
It is among few ELSS funds which delivered positive returns over different time frames. Sustained superior performance and proven expertise in beating peers across different phases of the market cycle makes the fund an attractive option.
AUM: ₹ 4,759 crores
Expense Ratio: 2.31 %
Minimum SIP: ₹ 500
1Y Returns: 28.66 %
3Y Returns: 12.35 %
5Y Returns: 22.92 %
Launched in 2005, Reliance Tax Saver Fund, is a ELSS fund which has consistently outperformed its benchmark since its inception and is one of the popular ELSS fund in market today.
AUM: ₹ 10,758 crores
Expense Ratio: 1.98 %
Minimum SIP: ₹ 500
1Y Returns: 22.60 %
3Y Returns: 8.72 %
5Y Returns: 22.83 %
Launched in 2008, IDFC Tax Advantage Fund, is a ELSS fund which has consistently outperformed its benchmark since its inception and has provided best returns over the years among ELSS funds.
AUM: ₹ 897 crores
Expense Ratio: 2.05 %
Minimum SIP: ₹ 500
1Y Returns: 34.78 %
3Y Returns: 13.95 %
5Y Returns: 21.40 %
To sum up all these points, the important factors that makes ELSS a better option are, shortest lock-in period and higher returns. This makes ELSS stand apart in today’s scenario. The growth of ELSS is way above PPF and FD from the above statistics.
Even though there are fluctuations in the graph, the growth never fell below PPF nor FD. This shows ELSS is much better option to invest rather than PPF nor FD for saving taxes under Section 80c as well as creating wealth in long term.
To look at some of the best performing funds from every category, check out Groww 30 best mutual funds to invest in 2018.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.