ELSS Mutual Funds

Frequently Asked Questions About ELSS

What is the lock-in period in ELSS?

ELSS funds are subject to a lock-in period of three years. In other words, investors cannot redeem their investments for three years starting from the investment date. This makes ELSS one of the attractive investment options under Section 80C, as it carries one of the lowest lock-in periods among all eligible investment options. Further, such a lock-in period of three years is only applicable for voluntary redemption. It does not mean the investments will be redeemed automatically at the end of the three years.

If investors opt for a Systematic Investment Plan (SIP), the ELSS lock-in period of three years is calculated separately for the investment and not from SIP registration itself. One should note that the lock-in period is inherent to the ELSS, irrespective of whether the investor has availed tax benefits for such investments or not. The lock-in period helps investors resist the temptation to redeem their assets during a market downturn which is counterproductive.

What are the tax benefits of ELSS?

ELSS are eligible for income tax exemption under Section 80C of the Indian Income Tax Act. Therefore, under this Section, you can avail ₹1.5 lakh maximum deduction for your ELSS investment. Please note that the tax benefit from ELSS is to be taken along with all the eligible tax saving options under Section 80C and not separately as an exclusive deduction of ₹1.5 lakhs.

Further, taxpayers who have opted for the new tax regime cannot avail of any tax benefits under Section 80C. Hence, such taxpayers may not get any tax deductions for ELSS investment.

Moreover, the investment in ELSS units must be mandatorily held for a minimum of three years, being the lock-in period. The gains arising from investment in such funds will be classified as Long-Term Capital Gains (LTCG). Such gains are taxed at a special rate of 10% (plus cess and surcharge as applicable) irrespective of the slab rates applicable to the investors.

Additionally, the gains up to ₹1 lakh per year from equity shares and equity funds are exempt from tax, thereby making returns from such funds tax effective.

How much return will I get from Equity Linked Savings Scheme (ELSS)?

As per the investment mandate under the ELSS category of funds, at least 80% of the fund's total assets must be invested in equity & equity-related securities. As such, ELSS returns are market-linked and depend on the investment portfolio's performance, as against most of the other investment options under Section 80C, which may provide guaranteed but only reasonable returns on the investment.

With ELSS investments, the investors get equipped with the potential of better returns, as equities may be volatile over the short term. But such funds generally perform better over the long term. This works well for investors considering ELSS investments in their financial plans with long-term goals.

Who should invest in ELSS?

Individuals looking for ways to avail of tax benefits under Section 80C of the Income Tax Act and reduce their annual tax liability may prefer investing in ELSS. However, apart from tax-saving, investors can use ELSS for wealth creation, as they can enjoy the flexibility of continuing with their ELSS investments even after the lock-in period.

This contrasts with other eligible investment options under Section 80C, which are liquidated automatically at the end of the specified tenor. The ELSS investments are not redeemed automatically after three years, and the investors must make a specific redemption request to liquidate their investments in ELSS.

As such, you may invest in ELSS to accomplish financial goals for longer than three years. Holding investments for extended periods may aid investors in wealth creation and achieving financial goals.

What are the different ways I can invest in ELSS?

You can invest in equity funds through lump sum or SIP. While ELSS lumpsum investment represents a one-time investment, SIP implies periodical investments made automatically by deducting the amount from the bank account and investing the amount in the specified mutual fund scheme.

Since an ELSS SIP eliminates timing bias and supports tax-saving goals, it is a preferred option among many investors. It allows investments to be spread across the year, instead of pressurising cash flows at year-end.

To invest, you can submit the application form physically at any official Points of Acceptance (POA) or online, i.e., through the website/mobile apps of the mutual fund house or Registrar and Transfer Agent (R&TA). In addition, in the case of SIP investing, you must also register the Mutual Fund Biller in the bank's net banking portal to enable regular investments through the bank account.

Disclaimers:

SIP is a feature offered for disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time. The tax provisions mentioned are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date.

Equity Linked Savings Scheme (ELSS) is an open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. Minimum investment in equity & equity related instruments - 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.