The vague idea regarding equity-linked savings schemes (ELSS) has caused many investors to misconstrue the purpose of putting money in them. Ideally sought as an essential tax-planning exercise, investments up to ₹1,50,000 a year in ELSS funds are subject to exemption from tax under Section 80C of the Income Tax Act, 1961. The lock-in period for these investments is three years, which means that one must stay invested in these funds during the period.
The problem arises when people stop investing in these funds beyond three years, not realising how they miss out on accumulating the much-desired corpus by discontinuing their investments in them.
One important aspect of tax planning is that investors cum taxpayers must link their tax-saving mechanisms to their financial goals. This is important as tax-saving measures are not included in the list of investments that can help save and invest in the long run. The minimum investment tenure is deemed and misconceived as the maximum investment tenure beyond which many investors fail to continue with their investments. This can be attributed to the common notion of tax-saving measures being limited to traditional instruments like the Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Savings Certificates (NSCs), Post Office Small Savings Schemes and tax-saving fixed deposits apart from insurance policies. The idea of using equity funds both to save on taxes and amass the much-needed money for a secure financial future still sounds novel to many investors who already look at the market in awe or denounce it as a risky investment measure.
How do ELSS mutual funds work?
As the name suggests, ELSS funds are types of mutual funds that invest in the stock market while lending tax benefits too. These funds are essentially diversified equity funds considering they put money in stocks of listed companies in proportions as per the objective of the fund house. There are active ELSS funds that put money in large-cap, mid-cap or small-cap funds and passive ELSS funds that follow the movement of a particular index. The idea behind parking your earnings in ELSS mutual funds is to continue earning on your investments, thus, maximising capital appreciation apart from relying on them for tax savings.
The following table highlights how continued investments in ELSS funds can help you accumulate an envious amount similar to most other equity funds in your investment portfolio.
Monthly investment (in Rs) | Name of the fund | Rate of returns (in %) | Investment tenure (in years) | Invested amount (in Rs) | The total value of the investment (in Rs) |
| 10,000 | Quant Tax Plan | 22.66 | 20 | 24,00,000 | 4,75,35,042 |
| 10,000 | SBI Tax Advantage Fund - Series III | 20.64 | 20 | 24,00,000 | 3,48,41,143 |
| 10,000 | Canara Robeco Equity Tax Saver Fund | 15.64 | 20 | 24,00,000 | 1,66,11,345 |
| 10,000 | Mirae Asset Tax Saver Fund | 14.65 | 20 | 24,00,000 | 1,44,25,162 |
Is ELSS taxable after three years?
Firstly, ELSS funds are locked in for three years, thus, doing away with the headache of taxes on short-term capital gains. Since redemption on these funds is allowed after three years only, capital gains up to ₹1 lakh are not subject to tax while gains over and above ₹1 lakh attract a long-term capital gains tax at 10 percent.
As opposed to traditional investment options wherein you cannot invest more than ₹1,50,000 to be eligible for a tax deduction, you can invest a greater amount at your convenience while still saving up to ₹46,800 a year as tax amount.
Should you invest in ELSS funds?
Anyone willing to put money in this fund and wait for a prolonged period, say a decade or two, can invest. Apart, this fund is preferred most by salaried people as they look for tax-saving options beyond EPF that can help them create wealth too.
The young and newly employed people are willing to bear market risks, thus, explaining their affinity for ELSS funds instead of the fixed-income plans that help to save on taxes but do not help create much wealth owing to the fixed return rates that are relatively low compared to the yields from the market. Undoubtedly, equity investments are riskier than bonds, but only in the short term. The risk is much lower if one invests for more than five years. As with all equity investments, the best way to begin is to invest in monthly systematic investment plans (SIPs) throughout the year. Investing through SIPs in an ELSS fund allows investors to accumulate more units when the market is down while also generating exceptional returns when the market is up.
Benefiting from ELSS funds
Compared to the most sought-after PPF, ELSS comes in with a shorter lock-in period, though wealth creation is possible only on prolonged investments. Even a simple ELSS investment of 15 years will earn you returns that can help you reach your financial goals faster.
The benefit of investing through daily, monthly, quarterly, half-yearly or annual SIPs apart from the high post-tax returns ensures its inclusion and importance in many investment portfolios.
