Everyone looks for schemes that give the best return on their investment and ELSS is one such way to invest. Equity Linked Savings Scheme (ELSS) is a type of mutual fund that helps you save on taxes while investing. ELSS funds come under Section 80C of the Income Tax Act making it a tax-saving investment option. Find out about ELSS funds, ELSS taxable rules, ELSS redemption rules, and more in this blog.
What are Tax Saver Investment options in India?
| Tax Saving Investment | Returns | Lock-in Tenure |
| ELSS Fund | Not Fixed | 3 years |
| National Pension Scheme (NPS) | 9% to 12% | Until Retirement |
| Unit Linked Insurance Plan (ULIP) | Not Fixed | 5 years |
| Public Provident Fund (PPF) | 7.1% (as of today) | 15 years |
| Sukanya Samriddhi Yojana | 7.6% | 21 years or till marriage |
| National Savings Certificate | 6.8% | 5 years |
| Senior Citizen Saving Scheme | 7.4% | 5 years |
| Bank FDs | 5.5% to 7.75% | 5 years |
Also read: Types of Mutual Funds for NRIs/OCIs in India
What is ELSS (Equity Linked Savings Scheme)?
Equity Linked Savings Scheme or ELSS are mutual fund investments that help you save on income tax. ELSS funds are equity-oriented and invest at least 65% of their portfolio into equity-linked securities and the rest into debt and money market instruments. ELSS funds come under Section 80C of the Income Tax Act making it a tax-saving investment option.
What is Sec 80C of the Income Tax Act?
Section 80C of the Income Tax Act, 1961, is one of the most popular and widely used sections for tax-saving among individual taxpayers in India. It allows individuals, NRIs/OCIs, and Hindu Undivided Families (HUFs) to claim deductions from their gross total income for various investments, expenses, and payments. The maximum deduction limit under this section is Rs. 1.5 lakh per financial year. Eligible investments and expenses include contributions to the Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), ELSS, tax-saving fixed deposits, life insurance premiums, and tuition fees for children, among others. By utilizing Section 80C, taxpayers can effectively reduce their taxable income, thus lowering their tax liability while also encouraging savings and investments.
Also read: 𝗕𝗲𝘀𝘁 𝗠𝘂𝘁𝘂𝗮𝗹 𝗙𝘂𝗻𝗱𝘀 for NRI in India 2024
Why is ELSS a better tax-saving investment scheme?
ELSS or Equity Linked Savings Scheme is a better form of investment because of various features that it offers like:
- High Equity Investment: Much of the portfolio is invested in equities.
- Short Lock-in Period: There is a mandatory lock-in period of 3 years, the shortest among tax-saving instruments.
- Dual Benefits: Tax-saving benefits and potential capital appreciation from equity investments.
- Income Options: Choose between dividend payouts for regular income or the growth option for capital appreciation.
- High Returns: Good ELSS funds can generate long-term returns of 10-12%, among the highest in tax-saving instruments.
Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs
How can ELSS help with tax savings?
Under Section 80C of the Income Tax Act, 1961, mutual funds offered by ELSS are allowed annual tax deductions of up to Rs 1,50,000. This results in tax savings of up to Rs 46,800 annually. But remember that after the date of investment, your money is locked in for three years. For example, you earn INR 8 lakh in taxable income yearly. To reduce your taxable income to INR 6.5 lakh (INR 8 lakh – INR 1.5 lakh), invest INR 1.5 lakh in an Equity Linked Savings Scheme (ELSS). You save money on income tax that you would have otherwise paid because of this decrease in taxable income.
What happens when you redeem ELSS funds after 3 years?
ELSS Mutual Funds have a mandatory lock-in period, usually lasting three years. During this time, investors are not allowed to redeem or withdraw their investments. However, after the lock-in period concludes, investors gain the flexibility to redeem their ELSS units. Since ELSS funds have a three-year lock-in period, short-term capital gains cannot be realized. Instead, only long-term capital gains are possible. These gains are tax-free up to Rs 1 lakh per year, and any amount exceeding this limit is subject to a 10% long-term capital gains tax.
Also read: NRI Mutual Fund Taxation in India 2024 Explained
Wrapping up
The Equity Linked Savings Scheme (ELSS) presents an attractive option for those looking to reduce their taxable income while making stock market investments. ELSS is unique among tax-saving vehicles because of its short lock-in period of three years, potential for significant returns, and the combined advantages of capital appreciation and tax savings. However, it’s important to take into consideration the potential risks related to equity investments. ELSS is a useful complement to a well-rounded investment portfolio since it provides an excellent combination of tax efficiency and growth potential.
Invest in Top Performing NRI ELSS Funds with SBNRI
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SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
Which ELSS is best for tax saving?
Below listed are a few of the top-performing ELSS funds in the market:
- Quant ELSS Tax Saver Fund Direct-Growth
- SBI Long-Term Equity Fund Direct-Growth
- Bank of India ELSS Tax Saver Fund
- Motilal Oswal ELSS Tax Saver Fund
- JM ELSS Tax Saver Fund
- HDFC ELSS Tax Saver Fund
- Bandhan ELSS Tax Saver Fund
- DSP ELSS Tax Saver Fund
Is ELSS taxable after 3 years?
Since ELSS funds have a three-year lock-in period, short-term capital gains cannot be realized. Instead, only long-term capital gains are possible. These gains are tax-free up to Rs 1 lakh per year, and any amount exceeding this limit is subject to a 10% long-term capital gains tax.
Are ELSS Mutual Funds high risk?
ELSS Funds invest in equities which is why in the short term, they can be changing. However, over the long term, the risk comes down substantially.
What kind of returns can I earn from ELSS?
ELSS Funds have on average delivered 21.05% p.a. returns in the last 5 years. Their 3 and 10-year annualized returns are 21.39% and 16.49% annually.
Is it mandatory to withdraw ELSS after 3 years?
ELSS Mutual Funds have a mandatory lock-in period, usually lasting three years. During this time, investors are not allowed to redeem or withdraw their investments. However, after the lock-in period concludes, investors gain the flexibility to redeem their ELSS units.
Is maturity of ELSS taxable or not?
Since ELSS funds have a three-year lock-in period, short-term capital gains cannot be realized. Instead, only long-term capital gains are possible. These gains are tax-free up to Rs 1 lakh per year, and any amount exceeding this limit is subject to a 10% long-term capital gains tax.
Is ELSS tax-exempt?
The gains generated from ELSS funds are tax-free up to Rs 1 lakh per year, and any amount exceeding this limit is subject to a 10% long-term capital gains tax.
