ELSS - A Combination of Tax Savings and Wealth Creation

Published On: 16-Aug-2019

The Indian Income Tax Act 1961 allows a tax benefit of Rs. 1.50 lakhs for making certain eligible investments under Section 80C. The available options include payment of life insurance premium, investment in five-year fixed deposit, contribution towards Employee Provident Fund (EPF), Public Provident Fund (PPF) etc.

Save Tax with Equity Linked Savings Scheme

Many investment options are allowed under Section 80C, but with limited tax benefit limit, it is important to choose the right kind the kind of investment products. ELSS (Equity Linked Savings Schemes) is one of the promising investment options, which renders a combination of tax savings and wealth creation to the taxpayers. Its popularity amongst the retail investors may be gauged from the fact that as on 30th June 2019, total assets under Management of ELSS funds is Rs. 0.98 lakh crores, forming approximately 13% of the AUM under all equity-oriented schemes in aggregate.

Source - Association of Mutual Funds in India - AMFI.

What is ELSS?

ELSS is a specified category of the mutual funds, which invests 65% or more in equity and equity-related instruments, and carries a three-year lock-in period. So, while one may avail a benefit of up to Rs. 1.50 lakhs only (for all the eligible investment options taken together), you may still choose to invest higher amounts in ELSS to stay on the course of wealth creation and aim to fulfil your financial goals.

Benefits of Investing in ELSS

The investors get the following ELSS benefits:

1. Lowest Lock-in Period amongst other Tax-Saving Investment Options

ELSS carries a lock-in period of only three years, which starts from the date of investment. This lock-in period is the lowest amongst all eligible investment options including fixed deposit (5 years), PPF has a lock-in period of 15 years from the date of opening the account. However, partial withdrawals are possible subject to certain conditions), five-year and 10-year National Savings Certificates (NSCs), etc. Further, even with a lock-in period of 3 years, the investors may choose to stay invested beyond such period and continue to accumulate wealth.

2. Potential of Wealth Creation

 While most of the investment options under Section 80C offer fixed returns to the investors, ELSS provides variable returns, linked to the performance of the investment portfolio. As equity markets have been generating better returns over the long term and ELSS invest at least 65% of the portfolio in equities, investing in ELSS for tax saving gives you the benefit of potential for better returns. Such returns are further boosted by the cash savings generated through a tax benefit, as also illustrated in the table below:



Amount (Rs.)

Amount Invested

Rs. 1,50,000

Tax Savings *

Rs. 46,800

Effective Investment (post tax savings)

Rs. 1,03,200

Assumed ELSS Returns


Returns on the Amount Invested

Rs. 18,000

Effective Returns post-tax saving


* Assumed the maximum marginal tax rate of 31.2% (30% plus 4% education cess, but excluding surcharge. The indicative returns of 12% are only for illustrative purposes, and the actual returns may vary.

While the past performance may not be a guarantee of future returns, the historical returns generated by ELSS funds may help the taxpayers have a fair comparison of different investment options. Despite the volatile movements in the equity markets in the recent times, ELSS funds, as a category average, have generated CAGR returns of 8.04% over the past three years and 9.86% over the past five years.

Source – ValueResearchOnline, data as on 26th July 2019.

Such returns render a long-lasting impact on the portfolio, due to the compounding effect of the investment returns over the long term. As such, investing in ELSS products provide a better wealth creation investment opportunity in the long run.

3. Preferential Taxation for Returns from ELSS

Since the funds are locked-in under ELSS for a minimum of three years, the returns generated through ELSS investments will be classified as long-term capital gains from equity schemes. As such, the returns (without indexation benefit) are taxed at a special rate of 10% (plus applicable surcharge and cess), as compared to the maximum marginal rate of 30% (plus applicable surcharge and cess). Further, there is a possibility of zero tax on such returns for the investors as the income tax laws allow an aggregate exemption of Rs. 1 lakh per year for all long-term capital gains from equities and equity-oriented mutual funds.

With the many benefits discussed above, ELSS may be a preferred investment option for your tax-saving and wealth-creation needs over the long term.