Unlocking Tax Savings with ELSS: Your Essential Guide to Equity Linked Savings Schemes

Unlocking Tax Savings with ELSS: Equity Linked Savings Scheme (ELSS) is a mutual fund category specializing in equity investments, offering the unique advantage of allowing investors to deduct the amount invested in ELSS from their taxable income. This tax benefit distinguishes ELSS from other equity-focused mutual funds. A key feature of ELSS is its three-year lock-in period, starting from the investment date, which means you can only withdraw your investment in ELSS after this period. Given its equity orientation, ELSS is advisable for longer-term investments, aiming for comparatively higher returns.

Unlocking Tax Savings with ELSS
Unlocking Tax Savings with ELSS
How to invest in ELSS funds?

There are two ways to invest in ELSS funds- Systematic Investment Plan (SIP) wherein you invest a pre-defined chunk of money at regular intervals in the scheme or Lump sum investment wherein you invest all the money at one go.

Scenario I- SIP

Let us assume that you have started a monthly SIP of Rs 5000 on 1st Jan 2020; then your lock-in period will be as follows:

Investment DateRedemption Value
1st Jan 20201st Jan 2023
15th May 202115th May 2024
19th Dec 202219th Dec 2025
Scenario II- Lump sum

If the same investment was made as a lump sum amount on 1st Jan 2020, then the entire capital can be redeemed on 1st Jan 2023.

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ELSS Tax Benefit

Funds invested in an ELSS scheme qualify for a deduction from your gross income under Section 80C of the Income Tax Act, 1961, with an upper limit of Rs 1.5 Lakh. For instance, initiating a Systematic Investment Plan (SIP) in an ELSS fund at Rs 10,000 monthly beginning on 1st April 2020 allows you to claim a yearly deduction of Rs 1,20,000 (12 x Rs 10,000) under Section 80C. This could lead to annual tax savings of approximately Rs 46,800. However, it’s important to note that tax laws are periodically updated. Hence, investors should seek advice from a tax professional before making investment decisions, to stay informed about any changes.

  • Investors who aim to achieve comparatively better returns than other traditional tax-saving investments
  • Investors who are looking to save tax while investing in a mutual fund scheme
  • First-time mutual fund investors who can seek the dual benefit of tax saving and long-term investments in mutual fund schemes
  • Investors with longer investment horizon than 3 years.
Tax Implication

The returns from ELSS are taxed like any other equity-oriented mutual fund scheme. Since ELSS comes with a lock-in period of 3 years, only long-term capital gains tax (LTCG) is applicable, i.e. 10% on your gains above Rs. 1 Lakh.
Example: – If you redeem an investment which has a current value of Rs 2,50,000 after 3 years of lock-in, Then the LTCG levied is 10% on Rs 1,50,000 (gains over Rs 1 Lakh), which is Rs 15,000.

Note: One can save tax upto ₹46,800: Individual and HUF having taxable income of less than ₹50 lakhs can invest upto ₹1.5 lakhs under the ELSS scheme during the FY 2020-21 as per provision of Section 80C of the Income Tax Act 1961 (Includes applicable cess). Tax saving will be proportionately reduced subject to the taxable income and investments. Further, Investment in ELSS schemes is subject to lock in period of 3 years from the date of allotment of units. Long Term capital gain, if any on ELSS scheme investment is subject to applicable tax at the time of redemption. The tax benefits are as per the current income tax laws and rules. Investors are advised to consult their tax advisor before investing in such schemes.

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