ELSS Funds

ELSS funds are a specialised category of mutual funds that primarily invest in equity or equity-related financial instruments. You can claim a tax deduction of up to ₹1.5 lakhs to reduce your taxable income through ELSS investments.

If you want to invest in ELSS mutual funds, you must understand them, how they work, and their unique features to maximise your returns.

Here is everything you need to know about ELSS mutual funds.

What are ELSS Mutual Funds?

ELSS funds, or Equity-Linked Savings Scheme funds, are tax-saving mutual funds that mainly invest in the equity shares of listed companies.

The proportion of equity exposure in ELSS funds is around 80%. The stocks chosen are from various sectors and have a wide range of market capitalisations.

Mutual funds gather money from multiple investors to invest in various financial instruments, including equities, bonds, debt funds and other money market instruments.

Expert fund managers manage ELSS mutual funds. They help you align your investments with your future goals and risk appetite.

ELSS mutual funds primarily focus on investing majorly in equities for higher returns. However, since these investments are equity-based, they come with a higher level of risk. Nevertheless, professional fund management helps navigate potential risks with strategic decisions.

ELSS mutual funds have a mandatory three-year lock-in period and offer exclusive tax benefits. Let us explore ELSS features and benefits in the following sections.

ELSS Features

Equity-​​Linked Investment

ELSS funds are bas​ed on equity-linked securities. Therefore, it has a higher growth potential compared to other financial instruments.

Lock-in ​​Period

ELSS funds have a ​​mandatory minimum lock-in period of three years. This means you cannot sell your ELSS mutual fund units during the first three years of investment.

Diversified Investm​​ent

ELSS funds inve​​st across various industries and market capitalisations. You can choose from the options to determine the best ELSS mutual fund based on your financial objectives.

Mode of Inve​stment

You can invest ​​in ELSS funds as a lump sum or through a Systematic Investment Plan (SIP). In a SIP, you can invest in ELSS regularly on a monthly, quarterly or semi-annual basis.

Flexibi​lity

You can cho​​ose the type of ELSS fund, period of investment and mode of investment (lump sum or SIP) based on your specific financial situation.

Market-Lin​​ked Returns

Returns on E​LSS funds are not fixed and guaranteed. They depend on market performance and can offer higher returns over the long term.

Risk P​rofile

​As the in​vestment is based primarily on equity, ELSS funds carry a higher risk.  

Tax Implicati​ons

Investments in ELS​​S funds qualify for tax deductions. The returns received from them are partially exempt and subject to taxation beyond the exemption limit. (Further details are provided in the following sections).

How Does ELSS Work?

Choice of Investme​​nt

First, you can ch​oose from a variety of top-rated ELSS funds available in the market based on your affordability, risk tolerance and financial objectives.

Method of I​​nvestment

Investments in E​LSS funds to purchase the units can be made either as a lump sum payment or through the Systematic Investment Plan (SIP).

Period of Inves​tment

Next, you can decide th​e period of investment. You need to stay invested for a minimum of three years. After this, you can decide whether to stay invested or sell your funds.

Stay Invested​ in the Mutual Fund Framework

ELSS funds ​​are based on a mutual fund framework managed by professional fund managers.

Closur​​e

If you rea​​ch the end of the investment period or choose to discontinue, you can sell your ELSS mutual fund units and receive the applicable payment.​

Benefits of ELSS Funds

Tax-saving In​​vestment

​Investments mad​e in ELSS funds qualify for a tax deduction for up to ₹1.5 lakhs under Section 80C. Also, the long-term capital gains received from ELSS are subject to an exemption of up to ₹1.25 lakhs.

Higher​​ Returns

Equity-based ​ELSS mutual funds offer higher returns over the long term.

Minimum I​​nvestment

You can start ​investing in an ELSS fund with a minimum amount, which can be as low as ₹500.

Low System​atic Investment Plan (SIP)

You can inve​​st in ELSS mutual funds systematically on a regular basis, such as monthly, quarterly or semi-annually, based on your affordability.

Easy to Invest and​​ Co​​nvenient to Manage

ELSS funds are e​​asy to invest in and manage seamlessly on online platforms.

Profession​al Management

Mutual funds ​are analysed, evaluated and managed by professional fund managers for investment decisions.

Dual Advan​tage

By investing in​​ ELSS mutual funds, you can benefit from market-linked returns and tax deduction and exemption benefits.

Affordab​​le

You can start​ investing in ELSS mutual funds with minimal capital and opt for SIP to continue investing conveniently.

Risk Mitigat​​​ion

As ELSS fund​s are spread across various sectors, it reduces the risk of industry or sector-specific developments that can affect fund performance.

Risks Involved in ELSS Funds

Investments in the financial securities market are subject to various types of risks. These risks can be caused by market fluctuations, changes in interest rates, policy announcements and other political and economic developments.

Some of the common risks that can affect ELSS funds are:

Market Ris​k

Investments i​n ELSS funds are affected by market fluctuations driven by investor sentiments, sector performance, and company financials. Therefore, the value of the funds can increase or decrease based on prevailing market conditions.

Interest R​​ate Risk

Revisions in inter​est rates can significantly affect the value of ELSS funds. An increase in interest rates can lower stock prices, reducing the investment value of the ELSS funds.

Liquidity R​​isk

The mandat​​​​ory three-year minimum lock-in period, along with certain downturns in the financial market, can restrict your ability to sell your ELSS mutual fund units.​

ELSS Mutual Fund Tax Benefit

• Section 80C Deduction- The amount invested in ELSS mutual funds qualifies for a tax deduction under Section 80C of the Income Tax Act. It can be directly deducted from your taxable income.
• Deduction Limit- The maximum deduction limit is ₹1.5 lakhs for the investment made in ELSS funds. However, it is important to note that this maximum limit is for all applicable investments and expenses allowed under Section 80C and does not apply only to ELSS funds.
• Applicable on Annual Investment- The tax deduction benefit is applicable to your annual investment in ELSS mutual funds for every financial year.
• ELSS Mutual Funds Tax Exemption- Long-term capital gains earned from ELSS funds are exempted up to a maximum of up to ₹1.25 lakhs. The ELSS taxation rules are discussed in the next section.

ELSS Taxation Rules

Investments in ELSS mutual funds generate capital gains. Since ELSS funds have a mandatory three-year lock-in period, short-term capital gains and their applicable tax calculations do not apply.

For long-term capital gains (LTCG) generated by ELSS mutual funds, payments are subject to an exemption of up to ₹1.25 lakhs from 2024 onwards. On gains exceeding ₹1.25, tax is calculated at 12.5%. Previously, the exemption limit was ₹1 lakh, and the tax rate on amounts exceeding ₹1 lakh was 10%.

Sample Illustration

For example, let us assume you earn ₹3 lakhs from selling your ELSS mutual fund units during the FY25. Tax applicable on the capital gains is calculated as follows:

How to Select the Best ELSS Mutual Fund? - Factors to Consider​

Determine you​r Financial Objectives

Identify the purp​ose behind your investment in ELSS funds. It can be for higher education, retirement benefits, starting a business and more.

Determine y​​our Risk Profile

Consider your curr​​ent financial situation, future commitments and potential risks to determine your risk tolerance level.

Compare and ​Choose

Use online platforms to assess and identify the top-rated ELSS funds. Compare the options based on ELSS features, such as performance and r​​eliability, to select the best ELSS mutual fund. It should align with your financial needs and match your risk tolerance level.

Evaluate Fund​ Performance and Returns

Analyse the histo​rical performance of the ELSS funds to understand their ability to generate returns.

Consider the Lo​ck-in Period and Investment Period

ELSS mutual​ funds have a three-year mandatory lock-in period. However, you can opt for a longer investment period, such as five or ten years, to help you better balance risk and returns for wealth creation.

Expense ​Ratio

The Expense Ra​tio is the annual charges to pay the mutual fund house to manage your investment. Choose an ELSS mutual fund with a lower expense ratio to ensure more of your money is invested for higher returns.

Risk-Adjusted Returns

To determ​ine risk-adjusted returns, consider common metrics such as the Sharpe Ratio. A higher risk-adjusted return shows that the investment is performing better, considering the risks involved.  

Reputation of ​the Fund House

Ensure you​ select a reputable fund house with a strong performance track record and expert fund management.

ELSS: How to Invest?

You can invest in ELSS mutual funds through various channels. Here are some of the most common options:

• Directly on the official website of the mutual fund company
• Using online investment platforms that offer a wide range of investment options
• Through brokerage firms or agencies that offer mutual fund investment services
• Via your bank, if they offer ELSS funds as part of their investment options

Comparison of ELSS Funds with Other Tax-Saving Financial Instruments

Who Should Invest in ELSS Mutual Funds?

Investors with a H​​igh-Risk Appetite

As ELSS mutual​ funds primarily invest in equity-linked financial instruments, it is suitable for investors having a high risk tolerance level.

Taxp​ayers

Individual tax​​payers who seek income tax benefits can invest in ELSS mutual funds to reduce their taxable income.

First-Tim​e Investors

Beginners wit​h no experience in managing investments can start with ELSS mutual funds for a guided investment platform with higher growth potential.

Young Salaried P​rofessionals

Young p​​rofessionals with salaried incomes can bear a significant amount of risk and can seek an SIP mode of investment for ELSS mutual funds.

Long-Term ​Investors

Investor​​s who seek long-term investment benefits and expect significant returns can invest in ELSS funds.​

Tax* Benefits Beyond ELSS Funds: Explore Section 80D for Health Insurance

While ELSS funds offer a tax deduction benefit of up to ₹1.5 lakhs under Section 80C, this applies to various expenses, savings and investments, not just ELSS funds.

It is important to explore other options, such as Section 80D, to maximise your tax savings and further reduce your income tax liability.

Section 80D offers a tax deduction benefit of up to ₹1 lakh for health insurance premiums paid for you, including your family and parents.

Health insurance plans not only reduce your income tax liability under Section 80D but also ensure financial security during unexpected medical emergencies.

Reliance General Insurance offers health insurance plans online with extensive coverage for various medical expenses. In addition, you can customise it with specific add-ons to enhance coverage for planned and unplanned medical expenses at affordable rates.

We also offer a convenient online platform to download your Section 80D certificate for your health insurance plan.

Frequently Asked Questions About ELSS Funds

1. What does ELSS refer to in mutual funds?

ELSS refers to a category of mutual funds that primarily invest in equities and have a three-year lock-in period. Investments in ELSS funds qualify for a tax deduction under Section 80C, and the returns are partially tax-exempt.

2. Are ELSS funds risk-free?

ELSS funds are subject to market fluctuations and carry a higher risk because they predominantly invest in equity-based financial instruments.

However, to avoid possible risks, you can choose reliable fund houses with professional and expert managers who have established a strong performance record.

3. How long should I stay invested in ELSS funds?

ELSS funds have a minimum three-year lock-in period, so you must remain invested for at least three years.

However, depending on your financial objectives and the investment period offered by the fund house, you can choose to remain invested beyond this period. The longer you stay invested, the higher the ELSS returns.

4. What is the exposure to equities in ELSS funds?

The proportion of equity exposure in ELSS funds is around 80%. However, it can differ across various fund houses.

5. Can I withdraw ELSS funds after three years?

ELSS funds have a minimum mandatory lock-in period of three years. You can sell your ELSS mutual fund units after this period and withdraw the applicable amount.

6. Is ELSS better than PPF?

PPF (Public Provident Funds) is a long-term tax-saving scheme with a fixed interest rate. The investment, interest earned, and returns accumulated are tax-exempt. This government-backed scheme is considered safer for conservative investors.

On the other hand, ELSS funds primarily invest in equities, making them relatively higher-risk investments. But they also provide the potential for higher returns. You can choose reliable and professional fund houses with expert fund managers to mitigate the risks and earn higher returns in the long term.

Therefore, the better option among the two will depend on your personal circumstances, financial objectives and risk appetite.

7. Is an ELSS mutual fund tax-free after three years?

Long-term capital gains (LTCG) generated by ELSS mutual funds are tax-exempt, up to ₹1.25 lakhs. On gains exceeding ₹1.25, tax is calculated at 12.5%.

8. Does ELSS offer higher returns?

As ELSS funds majorly invest in equities, they have the potential for higher returns in the long term. However, the ELSS returns are subject to market fluctuations and cannot guarantee returns.

9. Can I invest in ELSS mutual funds monthly?

Yes, you can choose to invest in ELSS funds monthly through the Systematic Investment Plan (SIP) option.

10. Can I withdraw ELSS funds within three years?

No, ELSS funds have a mandatory three-year lock-in period. Therefore, you cannot withdraw funds from the ELSS mutual fund scheme before the completion of this period.

Disclaimers:

*T&C Apply. For more details on risk factors, terms conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.

Tax benefits are subject to conditions under the Income Tax Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.