Five things to keep in mind before investing in ELSS

Published On: 05-Feb-2020

The AMFI (Association of Mutual Funds in India) data reveals that around 20% of the overall equity investor folios as on 30th November 2019 are invested in ELSS. This may reflect the emerging preference of Equity Linked Savings Scheme for tax saving purposes. However, instead of following the herd, you should make an informed decision about investing in ELSS of mutual funds. 


Here are five things you must keep in mind before investing in ELSS funds:

1. Tax Benefit :

ELSS is a part of the bouquet of investment and payment options to avail tax benefit under Section 80C of the Income Tax Act, 1961. The other tax savings investment and payment options under Section 80C include a deposit in Public Provident Fund (PPF), contribution to Employee Provident Fund (EPF), investment in five-year bank fixed deposit, life insurance premium, principal repayment of home loan for residential property, tuition fee for children etc. However, such benefit under Section 80C is restricted to Rs. 1.50 lakh in a financial year for all the eligible investments taken together. 

Before committing an amount towards ELSS investment for tax savings, you must also consider other tax-savings investments and payments made by you during the year. This should be an essential exercise, as any amount of investment in ELSS funds made over and above the Rs. 1.50 lakh limit in aggregate under Section 80C of Income Tax Act will not entitle the investor for any additional tax benefit, but the investment will still be subject to the specified lock-in period. 

2. Lock-in period :

Considering the availability of the tax benefit, the investment in ELSS funds is subject to a lock-in period of 3 years. As such, the investor cannot liquidate the investments nor pledge the same before three years. However, the investors must also note that this 3-year lock-in period is the lowest lock-in period amongst all the investment options available under Section 80C. Further, for investments under the Systematic Investment Plan (SIP) , the lock-in period of three years shall be the date of investment of each SIP instalment.

3. Tax Incidence :

While the long-term capital gains (LTCG) from equity-oriented mutual funds were exempt from tax until a couple of years back. The government of India has re-introduced the LTCG tax at the rate of 10%, without any benefit of indexation to the investors. As such, the realised gains from the ELSS portfolio must be calculated by subtracting the actual cost of investments from the redemption value and then taxed at 10%. Further, to protect the retail investors from higher tax incidence, an exemption for Rs. 1 lakh per year is allowed in aggregate for all LTCG from equity shares and equity-oriented mutual funds, including ELSS in a financial year. 

4. Redemption :

 Some investment options under Section 80C are redeemed/ liquidated automatically at the end of the lock-in period, without any action required from the investor. However, the case of ELSS is different, and the investors must place a specific redemption request for liquidating their ELSS investments. This, in a way, is also beneficial for the investors, as they may continue to stay invested in the pursuit of their long-term financial goals. 

5. Market linked Returns :

While few of the investment options eligible under Section 80C provide guaranteed returns, ELSS provides market-linked returns to the investors as per the performance of the fund portfolio. ELSS is a specific category of mutual funds, wherein 65% or more of the net assets of the mutual fund scheme must be invested in equity shares and equity-related securities. As such, investors must be comfortable with short-term volatility in equity markets. However, the investors may compare different investment options as per the historical returns generated by such investments. 

As such, with lower tax incidence and the potential of higher returns, ELSS may be indeed an interesting investment option to avail of the tax savings. However, the investor has the final say on the investment decision depending upon the preference of variable or guaranteed returns and the tax benefit available on incremental investment, after considering the other investments made.

Note: The tax provisions, as mentioned in the article, are updated as per the Finance (No. 2) Act, 2019. However, the tax incidence will be as per the tax laws as on the date of redemption of the mutual fund units.

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2019. Any action taken based on the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SAI carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.