Equity-Linked Savings Scheme (ELSS): An Eye on Tax-Saving Mutual Funds

Equity-linked savings scheme (ELSS) funds, also referred to as tax-saving mutual funds, are a combination of tax benefits with returns, as the category invests mostly in large-cap stocks. 

However, what differentiates ELSS from other tax-saving schemes such as Public Provident Funds (PPFs) and National Savings Certificates (NSCs) is the risk factor, which is relatively higher. 

As of December 4, 2023, the ELSS category showcased an average return of 20.19% as compared to the last year. The returns are higher than other tax-saving options, such as PPF or NSCs

Investors can claim a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income-Tax Act (ITA), 1961, for investment in ELSS under the old tax regime. However, those opting for the new tax regimen cannot avail of such a deduction. 

An investor has the choice to invest over Rs. 1.5 lakh, but the excess will not qualify for tax benefits under Section 80C of the ITA. The minimum investment that can be undertaken is Rs 500 and in multiples of Rs 500.

As per the Securities and Exchange Board of India (SEBI) mandate, ELSS funds must invest at least 80% in equity. The remaining 20%  can be held in cash or debt and money market instruments. Also, ELSS funds can invest in large-cap, multi-cap, or mid-cap stocks.

When it comes to the lock-in period, it is three years in the case of ELSS funds, during which selling the investments is not permissible. Tax-saving fixed deposits come with a five-year lock-in period, while PPF has a 15-year maturity period. Similarly, NSCs have a lock-in period of five years. 

Considering the three-year lock-in period, ELSS funds tend to generate long-term capital gains (LTCGs). LTCG up to Rs 1 lakh per year is tax-free, while gains exceeding this threshold attract an LTCG of 10%.

The category average return of one year is 20.19%, while the three-year category average return stands at 21.44%. Similarly, the 10-year returns stand at 17.39%.