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What is difference between ELSS and mutual funds?

What is the fundamental difference between ELSS and mutual funds? Which one can help me in saving tax? How should one choose between the two?


Equity Linked Saving Scheme (ELSS) is a type of Mutual Fund where investments are made in Equity. The major difference between ELSS and a normal Mutual Fund is the tax benefit that an investor gets for investing in an ELSS.

Key differences-

Lock- in –In ELSS there is a minimum lock-in period of 3 years in any/all ELSS schemes. Under ELSS schemes, pre-mature withdrawal is not allowed before the completion of lock-in period. In case of Mutual Funds there is no lock-in period, investments can be withdrawn at any point of time after investment.

Tax benefits- Although there is no upper ceiling for investing in an ELSS scheme, however tax benefits for ELSS are available to the tune of Rs. 150000 under Section 80C of the Income Tax Act. There is no such tax saving or benefit available for other mutual fund schemes.            

Like other mutual funds, any dividend received by the investor is tax-free. Similarly, Long Term Capital Gains (LTCG) arising upon sale of mutual funds after a period of one year is also exempt.

Just like Mutual Funds, any resident individual including HUF can invest in an ELSS. Non Resident Individuals (NRI) can also invest in these schemes.

ELSS is preferred by investors looking to get tax benefit by getting a deduction in their total taxable income. Just like normal mutual fund, an ELSS can also be bought and sold on a regular basis by an investor an Net Asset Value (NAV).

The investors get a wide variety of investment options under Mutual Funds and ELSS, moreover both of them have asset allocation in a different sectors so as to give exposure to investors in all the sectors.

  Few ELSS schemes are:


ELSS is a type of Mutual Fund Scheme. Thus, if mutual fund is the tree, then ELSS is one of its branches.

Any Mutual Fund Scheme has the following features:

· Money is collected from a pool of investors. This corpus is then invested in instruments, whether debt or equity, that best aligns with the investment objective of the investor.

· There can broadly be the following types of schemes:

 Equity Oriented Scheme

o  Debt Oriented Scheme

· Mutual Funds diversify investment across various asset classes as also between securities within the same asset class. This helps in mitigating risk.

· Taxability of mutual funds varies depending upon not only the type of scheme but also whether the money was invested for short term or long term. You can read more about tax implications of investing in Mutual Funds here.

Besides these inherent features of Mutual Funds, Equity Linked Savings Scheme (ELSS) has the following features:

· ELSS invests at least 80% of the corpus in equity instruments, that is, it is a heavily equity oriented scheme.

· It falls under exempt-exempt-exempt category. This means that the amount that you had initially invested, the return earned as well as the final proceeds upon maturity are exempt from tax. The investor can also claim deduction of upto ₹1.5 lakhs under Section 80C of Income Tax Act, 1961.

· The lock-in period for investing in ELSS is 3 years. This means that you cannot withdraw from the scheme for a period of 3years of the first date of investing in the scheme. Doing so will attract a huge penalty.

You can read more about ELSS here.

Hope this solves your query!


An Equity Linked Savings Scheme (ELSS) is a type of tax saving mutual fund that an investor can invest in to reduce their tax burden upto Rs.1.5 Lakh under the sec 80C.

Features of ELSS include:

  • 3 year lock in period
  • Equity diversified fund
  • No guarantee on return, unlike mutual funds
  • No exit load
  • Expense ratio varies from 2.25-2.5%

For the purpose of tax saving ELSS is the best option for an investor to invest in.

Pijush Kanti Biswas

ELSS is nothing but a type of mutual fund and comes under broader category of equity mutual funds.

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.

ELSS when compared to other mutual funds options:

  • 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 INR 1,50,000 by investing in ELSS funds.
  • 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 as compared to large cap funds and debt funds.
  • The lock-in period of ELSS 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.
  • ELSS returns are tax free after lock-in period of 3 years. Whereas equity funds returns are tax free is sold after one year when they are accounted under long term capital gains tax.

Depending on your investment goals choose the right mutual fund available in market.

Some examples of popular ELSS for 2017:

  1. Reliance Tax Saver (ELSS) Fund 
  2. IDFC Tax Advantage (ELSS) Fund 
  3. Aditya Birla Sun Life Tax Relief 96

Happy Investing!

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