ELSS – Equity Linked Savings Scheme is a diversified equity mutual fund which has a majority of the corpus invested in equities. This type of mutual fund has a lock-in period of 3 years. This means if you start a Systematic Investment Plan (SIP) in an ELSS, then each of your investments will be locked in for three years from the respective investment date.
Like other mutual funds, Equity Linked Savings Scheme has both growth and dividend options. In growth option, investors get a lump sum on the expiry. On the other hand, investors get a regular dividend income in dividend option.
The investor can claim up to ₹1 lakh as a deduction from his gross taxable income under section 80C of the Income Tax Act. ELSS fall under the exempt – exempt – exempt (EEE) category. That means investments get tax deduction under section 80C. The capital gains generated by the fund are exempt from tax. Finally, withdrawals are also tax-free.
The primary purpose of Equity Linked Saving Scheme investment should be to achieve a future financial goal or to create long-term wealth for distant goals like retirement planning etc. and tax saving in the year of investment should be an incidental benefit or a secondary objective. This mutual fund is preferred to open-ended Equity Schemes because of two reasons, namely tax saving and discipline of holding for a longer period.
Advantages of ELSS over other tax Saving Instruments
Compared to other tax saving instruments like bank fixed deposits, Public Provident Fund (PPF) and National Savings Certificate (NSC); the lock-in period of Equity Savings Scheme is much lower. While ELSS investment is locked for 3 years, PPF is locked for 15 years, NSC is locked in 5 years and bank fixed deposits eligible for tax deduction are locked in for 5 years. As ELSS is an investment in equity markets and investing in this for a long-term can give better returns compared to other asset classes over a long-term.
Best ELSS Funds
Following are the best ELSS funds:-
- Axis Long Term Equity Funds.
- Birla Sun Life Tax Relief 96.
- Birla Sun Life Tax Plan.
- Reliance Tax Saver.
- Religare Invesco Tax Plan.
- BNP Paribas Long Term Equity Fund.
- Franklin India Taxshield Fund.
- ICICI Prudential Long Term Equity (Tax Saving).
- DSP BlackRock Tax Saver Fund.
- IDFC Tax Advantage (ELSS) Fund.