ELSS Mutual Funds - What is ELSS Funds & How to Invest in India?

What are ELSS Funds?

Equity Linked Saving Schemes or ELSS mutual funds are tax saving mutual funds. As per the Old Regime of taxation, ELSS funds enjoy tax benefits of up to Rs 1.50 lakhs in a financial year, under Section 80C of the Income Tax Act, 1961. Only the amount invested in these mutual funds are tax exempt.

The New Tax Regime does not give the benefits of ELSS tax saving and treats the ELSS like any other equity linked savings scheme.

Features of ELSS Mutual Funds

The ELSS funds are mutual funds that predominantly invest minimum 80% of their holdings in equity or equity related securities. There is a mandatory lock in period of 3 years from the date of investmentin these funds. This means, in case of SIP investment in these funds, each SIP instalment will be locked in for 3 years from the date of investment (vide Section 2.6.1 Table A (Equity Schemes, SEBI Master Circular for Mutual Funds dated 27th June 2024). Any redemption can be only possible after the lapse of these 3 years. There is no maximum limit on how long you Can stay invested in an ELSS fund. It is worthy to note that the 3 year lock-in period is the lowest amongst all tax saving instruments like PPF, NSC etc. which have been specified under Section 80C of the Income Tax Act, 1961.

How Does ELSS Funds Work?

ELSS mutual funds work in the same way as other equity mutual fund schemes. The amount invested into the ELSS funds by the investors is pooled by the Asset Management Company under the expertise of Fund Management team to invest into stocks and other related securities in the market as per the allocation and Investment Strategy of Scheme Information Document. The ELSS earns returns as per the benchmark of the Scheme as per Clause 2.6 of SEBI Master Circular dated June 27, 2024. Over a 3–5-year period ELSS funds may deliver relatively better returns than any of the other tax saving options available under Section 80C of the Income Tax Act.

At the time that you are filing your IT returns, you will need to show the certificate issued by your ELSS fund to claim a deduction of the invested amount up to a maximum limit of Rs 1.5 lakhs as mentioned earlier.

How Should You Invest in an ELSS Fund?

Following are the steps to invest in ELSS mutual funds:

1. Choose the ELSS scheme you would like to invest in, after researching the vast number of ELSS schemes available.
2. The next thing is to plan the amount you want to invest in the ELSS. The minimum lumpsum amount you can invest in the ELSS is Rs 500/- and although there is no cap on the maximum amount you can invest in ELSS funds, the ELSS tax saving benefits can be availed for only 1.5 lakhs in a financial year.
3. At the next step you may choose to invest the maximum limit of Rs 1.50 lakhs as a lumpsum or go for the SIP option to invest Rs 12,500/- per month in the ELSS by simply completing your documentation like KYC and furnishing bank details as well as draw an Electronic Clearing Service(ECS)mandate for ease of transaction if you are going the SIP way.
4. Your SIP amount will automatically start getting deducted at the date of the month that you choose while submitting the application.

Why should you invest in ELSS Tax Saving Mutual Funds?

1. With ELSS investment of Rs 1.50 lakhs you can save taxes worth up to 46,800/- per year, if you are in the highest tax bracket. ELSS are the only mutual funds that enjoy this tax benefit.
2. The ELSS has a predominantly equity portion. This means that the amount you invested into the ELSS fund attracts equity market growth. Equity has historically beaten inflation and is a good option if you seek capital appreciation in the long term.
3. The 3-year lock in period helps you in bringing discipline to your staying invested, as although it limits your options of redemption, the lock in period also offers long term capital appreciation.
4. You may link your ELSS investment to your mid-to-long-term financial goals. The fact that you are getting to use the money that you would have otherwise spent in paying taxes for capital growth is a good investment move.
5. An Systematic Investment Plan (SIP) in ELSS helps you reap the benefits of rupee cost averaging as well as compounded returns on your investments.

Taxation Rules of ELSS Funds

When you redeem funds from an ELSS scheme, the proceeds are taxed as per long term capital gains. Capital gains of up to Rs 1.25 lakh from the fund is exempted from tax and taxed at 12.5% thereafter.

Contact your mutual fund distributor or financial planner to understand how to invest in an ELSS scheme.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.