Tax Saver Fund (ELSS)

The Equity Linked Savings Scheme (ELSS) is the only tax saving mutual fund available in India. With ELSS, you can claim a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

The popularity of ELSS has steadily risen over the years for two reasons. Firstly, investors can claim huge tax deductions and secondly, the returns are comparatively higher than other investment schemes. Here are its unique features, advantages and disadvantages.

Features of ELSS

Amount range-

An investor can invest minimum Rs 5000 for lump sum investments and Rs 500 for SIP investments. There is no maximum limit while investing in ELSS.

Diversified portfolio-

The majority of ELSS invest in equity, however, there are a few debt based schemes too.

Lock-in period-

ELSS, unlike any other mutual fund schemes, has a minimum lock-in period of 3 years. An investor cannot prematurely withdraw before the completion of the lock-in period.

Tax benefits-

An investor can claim tax benefits up to Rs 1.5 lakh under Section 80C of the Income Tax Act. No other mutual fund scheme has this feature.

Advantages of ELSS funds

Shorter lock-in investment tenure- ELSS has a lower lock-in period in comparison to Public Provident Fund (PPF), National Savings Certificate (NSC) and Employee’s Provident Fund (EPF).

Higher returns-

Returns are significantly higher than other tax saving investment schemes such as PPF. Compared to approximately 12% returns are generated by ELSS over a period of 10 years; PPF generates only around 8%.

Relatively lower tax on gains-

Since the minimum period of ELSS is 3 years, any gain from the sale of ELSS funds are treated as long-term gains. Gains above Rs. 1 lakh are taxable at the rate of 10%. In contrast, 15% tax is levied on short-term capital gains. This makes ELSS taxpayer friendly.

SIP alternative-

Investors can choose to avail the SIP option while investing in ELSS. It allows investors to invest a fixed amount at regular/periodic intervals, making it ideal for salaried investors.

Transparent and secured-

ELSS is one of the most transparent and most secured investment options. The SEBI keeps a strict vigil on all mutual fund companies offering ELSS.

Disadvantages of ELSS funds

Risky-

ELSS is not generally meant for investors who are totally averse to taking risks. Since it is a stock market investment, it has all the risks that are associated with equity investments. ELSS does not guarantee fixed returns like PPF or NSC.

No premature withdrawal option-

ELSS has a minimum 3-year lock-in period and investors cannot withdraw the amount before the completion of 3 years, under no circumstances.