ELSS mutual funds are equity linked saving schemes which are eligible for tax deduction under section 80C of income tax act.
You can invest in the ELSS funds and claim a deduction of up to 1.5 lakh under section 80C. ELSS funds offer better returns as compared to other tax-saving investments like PPF, NSC, or NPS with a locking period of just 3 years.
What is ELSS Fund
Equity-Linked Savings Scheme is a special mutual fund investment that gives you a return around 13%-15% along with that you save money on taxes.
ELSS funds invest in equities to get higher returns. But those investments are diversified among different classifications.
Being equity oriented, ELSS funds come under risk-oriented investment instruments, so make sure that you are comfortable with market fluctuations.
Features of Equity Linked Saving Scheme
#1. Tax Exemption U/s 80C
Major benefit of investing in ELSS Funds is that you get a tax deduction of up to. Rs 1.5 lakh per year u/s 80C of Income Tax Act, 1961.
You can invest any amount even more than 1.5 lakh in ELSS funds but you can claim a total deduction only up to Rs. 1.5 lakhs per annum under 80C.
However, profits earned on the investments are taxable. You have to pay 10% long term capital gains if you earn more than Rs. 1 lakh in one year.
#2. Diversified Equity Funds
ELSS funds invest in diversified equities that include large-cap, small-cap and mid-cap.
Diversified equity funds invest up to 80% money in the equities that make it a risk-oriented investment while other tax saving schemes are secure investments.
You get better returns compared to other tax savings schemes like PPF if you invest with a long term goal. Because equity-based investments on the long run give higher returns if you ignore the regular market fluctuations.
I have compared the the ELSS funds with other tax saving investment in the later section of the article.
#3. Flexible investment options
You can invest flexibly in the ELSS funds which is not possible in other tax saving schemes.
Just like other mutual funds, you can either invest in lumpsum or through SIP (Systematic Investment Plan).
This flexibility to invest through investment enables you to invest small amounts regularly if you can’t make a lump sum investment.
SIPs make you more disciplined in investing without compromising the long term gains.
#4. 3 Years Lock-in Period
ELSS Funds come with 3 years lock-in period. You can’t sell or withdraw your investment in the lock-in period.
Lock-in period works differently with the type investment – lumpsum or SIP (Systematic Investment Plan)
If you are investing lumpsum money let’s say Rs. 1 lakh in ELSS funds on 1 April 2020, lock-in period will be 1 April 2020 – 31 March 2023.
On the other hand, if you invest Rs. 1 lakh in 5 SIPs as below-
- Funds bought in 1st SIP on 1 April 2020 will have lock-in period till 31 march 2023
- Funds bought in 2nd SIP on 1 May 2020 will have lock-in period till 30 April 2023
- Funds bought in 3rd SIP on 1 June 2020 will have lock-in period till 31 May 2023
- Funds bought in 4th SIP on 1 July 2020 will have lock-in period till 30 June 2023
- Funds bought in 5th SIP on 1 August 2020 will have lock-in period till 31 July 2023
#5. NO Exit Load
You have to pay some fee while redeeming a mutual fund that is called Exit Load. Mutual funds are a pool of investors and if all the investors will start withdrawing money at the same time, mutual funds Asset Management Companies have to change the investment strategy.
To discourage people from purposeless selling, AMCs have fixed exit loads (1%-2%) that you have to pay while selling your mutual funds before the maturity date.
Since ELSS funds have a lock-in period and you can’t withdraw money in the initial three years, there’s no exit load that you have to pay on your funds.
Also read – PPF interest rates in India.
How to Invest in ELSS Funds in India
There are five options through which you can invest in ELSS.
#1. Direct Investment Through Fund Houses
You can invest in ELSS funds directly from AMC or Fund House’s website. If you are confident of investing yourself, you can save some money by investing directly through AMCs portal rather than going through a broker.
What you have to do is, go to the AMC website, register with a user id, and start investing.
- Go to the HDFC Mutual fund house website and you can get the option of ‘New User Registration’ to create a user account for mutual fund investments.
- Fill the details to create a user account.
- Log in with that account and start buying funds
#2. Using your Demat Account
You can use your demat account to invest in ELSS funds if your broker is providing mutual funds investment service.
You can check out on your broker’s website and start investing in ELSS funds using the demat account you already have.
For example, if you have a demat account with 5paisa broker, you can go to their mutual fund page and start investing in ELSS funds under ‘Save tax’ option.
Here’s the step-by-step process.
- Go to 5paisa website
- Go to ‘Mutual Funds’ menu and click on ‘Save Tax’
- Select fund from the list
- Fill the required details like amount of money to invest. Type of investment – SIP or lumpsum. Now click on ‘Proceed’.
- Log into your registered account
- Make the payment and done.
#3. Online MF Investment Platform
You can use an online mutual fund investment portal to start investing in ELSS funds. There are multiple platforms like ETMoney, Paisabazaar that allow you to invest in mutual funds using different investment categories.
For example, ETMoney gives you plenty of categories to invest if you want to invest in mutual funds other than ELSS funds.
You can select any idea that matches your investment goals. Recently they have added a new category “Mutual funds for COVID-19” to help you save money with such strong funds that have passed such volatile markets and are likely to bounce back stronger.
You have to create an account with an online mutual funds service provider. ETMoney allows you to log in using your Gmail account.
- Go to ETMoney website and go to ‘Investments’ section
- Click on ‘ELSS Funds or Tax Saver Funds’ from the list
- Select fund from the list
- Fill the details and click on ‘Continue’.
- Enter your email address. You can use your Google account as well.
- Enter OTP sent to your email address
- Enter the PAN card details
- It will ask for your bank details, enter bank details and finally proceed for the payment.
#4. Through Your Agent
You can find a local agent or fund advisor that will help you invest into mutual funds offline. This is one of the oldest methods of investment in stocks or mutual funds.
You have to follow steps given below to invest in ELSS funds through an Agent.
- Reach out your local agent
- Fill the application form to buy certain funds (ELSS)
- He will ask you for documents like PAN card, Aadhar to complete the KYC
- He can also demand a canceled check or bank passbook copy
Once completing these steps, he will buy you funds of your choice and will give you an invoice of purchase.
#5. Through Registrars
There are some mutual funds record-keeping companies like Karvy and CAMS. You can also invest in ELSS funds through registrars like Karvy and CAMS.
You can invest either online or offline. They sometimes offer different products in the online and offline methods.
Let’s discuss how to invest in ELSS funds through registrars.
#1. Offline method
You have to reach the local registrar’s office and fill out an application form to buy desired ELSS funds.
- Fill application form
- Attach Aadhaar and Pan card
- Attach Bank statement or cancelled cheque
- Submit the form to dealing staff
- Cheque of mutual funds amount
#2. Online method
Let me show you how to invest through a registrar using CAMS’s example.
- Go to CAMS’s website and click on myCAMS services in the bottom
- Enter email id and click on continue.
- Fill all the details including PAN card number and click on ‘Continue’.
- You will automatically get an OTP on your registered mobile number.
- Enter bank details and click on ‘Continue’.
- Select the ELSS fund from the list and pay the required amount.
Tax Benefit of ELSS Funds
Equity Linked Saving Scheme (ELSS) or a tax saving mutual fund scheme help you to save taxes under Section 80C of the Income Tax Act 1961.
In ELSS funds, you are eligible for a tax deduction of up to Rs 1.5 lakh.
But ELSS funds come under LTCG (Long Term Capital Gains). You have to pay a 10% tax for gains over 1 lakh rupees in that year.
ELSS Funds vs Other Tax Saving Investment
|Lock-in period||3 years||15 years||5 years||Till retirement||5 years|
|Tax on returns||No||No||Yes||Yes||Yes|
|Risk||Market based risk||Secure||Secure||Minor risk||Secure|
Also read – FD interest rates in 2020
Frequently Asked Questions
#1. Who can invest in ELSS Mutual funds?
People who want to save taxes but they also want higher returns on their investment. They can invest in ELSS Funds.
You can invest in ELSS funds if you can risk your money and you have long term investments goals.
#2. What to do after the ELSS Lock-in Period is over?
You should keep your money invested in ELSS funds even after the lock-in period is over. You can earn decent gains if kept invested for long periods of time like 8-10 years.
You can withdraw money only if you have some financial emergency.
#3. Why is ELSS better than all other tax-saving Investments?
Because of the higher rate of returns. ELSS funds not only give you the benefit of tax exemption, you also get an average of 13-15% return if invested for a minimum of 5 years.
#4. How much tax can I save by investing in ELSS?
If you invest in ELSS funds, you can save up to Rs 46,000 (tax exemption up to Rs 1,50,000) in one year in taxes under Section 80C of the Income Tax Act, 1961.
#5. What is the investment limit for ELSS?
You can start your investment as low as Rs. 500/month, and there is no upper limit on investment in ELSS funds but tax benefits you can avail is capped to Rs. 1.50 lakh.
Another option is to divide your money in ELSS as well as in PPF to balance your portfolio.