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Elss Funds: a Combination of Both Wealth Creation & Tax Saving

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Who would not like their investment to offer wealth creation benefits along with tax savings? Well, there is one financial product that provides the best of both worlds, that is  ELSS or Equity Linked Savings Scheme. This is the reason why ELSS is trending in the investor’s world.

SEBI, the market regulator has stated that ELSS or Equity Linked Saving Scheme has to invest a minimum of 80% of total assets in equity and equity-related instruments.


What are elss funds? 

ELSS or Equity Linked savings scheme is a fund that invests the majority of the investment amount in equity or equity-related instruments to generate wealth. But they are known majorly for their tax-saving facility. The best thing about ELSS funds is that it comes with a lock-in period of 3 years but it has no maximum tenure of investment!

Secondly, by investing in ELSS mutual funds as per the Income Tax, you can get tax exemption up to 1,50,000 under section 80C. Being a first-time investor then ELSS is an excellent option because it provides tax savings and wealth creation.

What makes elss different from other equity mutual funds?

  • The major distinction between an ELSS & other equity mutual funds is that the former comes under the tax benefits of Section 80C. Whereas, other equity mutual funds are not so eligible for the same.
  • Secondly, unlike other equity schemes that do not have any lock-in period, thus if you redeem your investments before one year you might have to end up paying an exit load. Whereas ELSS comes with a lock-in period of 3 years
  • Other equity-oriented schemes generally have 65% required to be invested in equity, whereas under ELSS you can invest a minimum of 80% in equity and equity products.

ELSS funds: A combination of both wealth creation & tax saving

Did you know that in the last 10 years ELSS as a category has given an annualized return of 16.07%? This period was long enough to assess the efficacy of any volatile investment product. Thus because of this, ELSS is believed to be a promising investment for taxpayers.

For instance, if you invest 1.50 lakh every year for say active 35 years of your career, you will end up accumulating a corpus of 1.71 crores approximately. This is considering the above case.

For investments made in ELSS, an individual, and a HUF can claim a deduction under Section 80C up to Rs. 1.50 lakh every year.

As stated above, ELSS has a lock-in of three years, therefore the profits at the time of redemption will be taxed as a long term only which are tax-free up to Rs. 1 lakh every year and beyond which it is taxed at a flat rate of 10%.  Each installment of SIP and STP in ELSS has to be treated as a separate investment for the purpose of taxation!

Advantages of investing in ELSS

  • The best advantage of ELSS is that it provides ease in making investments by automating them through SIP or STP (Systematic Transfer Plan).
  • As ELSS has the Shortest lock-in period of three years, then also it offers more liquidity in the medium term. While other products like tax-saving fixed deposits have a five-year lock-in, whereas, PPF has a 15-year maturity!
  • Thirdly, ELSS has the potential to yield quite higher wealth in a medium to long-term investment horizon, as it is a market-linked product with tax-saving benefits!
  • Long Term Capital Gains from ELSS are tax-free up to a limit of ?1 lac. Therefore, the gains over 1 lakh can attract a tax rate of just 10%, this portrays that the lower tax rates are connected with higher returns in order to ensure the best post-tax returns!