Equity Linked Savings Schemes (ELSS): What is it and what are the Tax Benefits?

Equity Linked Savings Schemes (ELSS): What is it and what are the Tax Benefits?

Equity Linked Savings Schemes, also known as ELSS, are a kind of mutual fund plans that place the majority of their investments in the equity market. Section 80C of the Income Tax Act allows for tax deductions for investments made in ELSS mutual funds up to a maximum of 1.5 lac. The shortest lock-in term of 3 years, which ELSS has over other tax saving devices, is an advantage. So, you can only sell your investment three years after the date of purchase! ELSS SIP if you have one (Systematic Investment Plan).


How do ELSS mutual funds function?

Diversified equity funds include ELSS Funds. specified proportion of stocks in listed companies. When choosing the companies, share capital (Large Capitals, Mid Caps, Small Caps), as well as industry sectors, are taken into account. These funds aim to maximise wealth development over the long term. After doing a thorough market research, the fund management chooses equities to delivering the highest risk-adjusted portfolio returns

Schemes (tax saver mutual funds) are also one of the most tax-efficient investment options that qualify for Section 80C tax-deferral. Contrary to many fixed income 80C investment alternatives, there is no taxation during the investment term. Capital gains from Equity Linked Savings Schemes up to Rs 1 lakh in a year are tax deductible because ELSS are equity oriented schemes with a minimum purchase period of three years. 10% tax is applied to capital gains over Rs 1 lakh in any given fiscal year.

The dividends that investors get from ELSS funds are exempt from taxation. Investments in Equity linked savings mutual fund schemes include the benefits of tax deductions and long-term wealth accumulation. Three years is the lowest lock-in period for all tax-saving investments, and ELSS mutual funds provide the best potential return among 80C options.

ELSS and other tax-saving strategies are compared

You can gradually build wealth by utilising a variety of tax-savings strategies, including FDs, PPFs, and NSCs, to mention a few.

However, the profits that these systems offer are constrained.

This is where ELSS differs from other investment options since its returns are typically higher, specifically when the markets are moving upward. Even the ELSS post-tax returns are far more alluring than any other tax-saving investing choice.

What justifies investing in ELSS Funds?

You can reduce your tax burden while also building up your wealth over time by investing in ELSS mutual funds. Due to their three-year lock-in duration, these funds are appropriate for both short- and long-term investments. Compared to other tax-saving investments, these funds’ equity exposure offers you the chance to generate returns that are significantly larger.

Benefits of Equity linked savings Mutual Fund schemes

The following are some of these funds’ benefits:

Tax Savings: The only sort of Mutual Funds that qualify for annual tax deductions of roughly Rs 1.5 lakh are ELSS funds. Tax deductions on these monies are permitted under Section 80c Tax Act.

Even with the new tax law, which makes long-term investment income from ELSS over Rs 1 lakh taxable, these funds remain one of the best ways to reduce your tax burden. Compared to alternative investments like Health Reimbursement Plans (ULIPs) or Government Provident, these provide better post-tax returns (PPF).

Short lock-in period: Unlike other assets like Public Provident, ELSS funds are only locked in for three years after you make a purchase.

Who ought to make investments in ELSS Mutual funds?

Investors in ELSS might think about doing so if they wish to take advantage of the Section 80C rules, which allow for write offs of up to Rs 1.5 lakh and are risk-averse.

These mutual funds have an equity focus, and a least of 60% of their portfolio must be made up of equities and equity-linked investments.

Therefore, it’s crucial to hold onto your investments for at least three to five years in order to get the best returns on your money.

Does ELSS have any tax implications?

Since ELSS mutual funds invest largely in equities and equity-linked products, they are taxed similarly to equity funds.

Due to the three-year lock-in period that is a requirement for these funds, long-term capital gains tax will unavoidably be assessed upon redemption.

These funds’ dividend payments are applied to your income and taxed appropriately.

Also learn:


ELSS mutual funds are the greatest investment options because of their greater returns and quick lock-in periods. The plan’s most advantageous aspect is the tax savings it offers.

Every portfolio needs equity linked savings schemes as a key piece of machinery. To make investing and monitoring your financial portfolio simpler, you can open a demat account in India.

Having a demat account allows you to access your entire portfolio at once, which is one of its benefits. Open a Demat account to begin your fruitful and lengthy investment journey.

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