ELSS (Equity Linked Savings Scheme)
ELSS (Equity Linked Savings Schemes), also commonly known as tax saving mutual funds, are open-ended equity mutual funds that invest in domestic equity markets and qualify as 80C tax saving instruments.
An individual can save upto ₹ 46,350 every year of tax by investing in tax saving mutual funds. Indian Income Tax Section 80C allows upto ₹ 1,50,000 tax exempt investments to be made every year. There are multiple investment options under 80C, but ELSS investments have been the star performer amongst them (highest returns historically along with lowest lock-in period).
KEY HIGHLIGHTS
Highest tax free returns
ELSS funds have given an investor the highest tax free return (3% - 4% higher on an average than the next best tax saving security) as these invest in equities, which have historically proven to give much higher returns as compared to fixed income instruments. Capital gains and dividends received from ELSS funds are tax free.
Lowest lock-in period (3 years)
ELSS has the lowest lock-in period amongst all products exempt u/s 80C.
| ELSS v/s OTHER TAX SAVING INSTRUMENTS | ||||||||
|---|---|---|---|---|---|---|---|---|
| ELSS | PPF | NSC | FD | LIC | ULIP | PO Time Deposit | Sukanya Samriddhi Yojana | |
| Pre-Tax Returns | 12 - 14% * | 8% | 8% | 6.5 - 7.5% | 5 - 7% | 9 - 10% | 7.8% | 8.6% |
| Tax | LTCG# | Tax free | Interest is taxable | Interest is taxable | Tax free | Tax free | Interest is taxable | Tax free |
| Post Tax Returns | 11 - 13% | 8% | 5.60% | 4.55 - 5.95% | 5 - 7% | 9 - 10% | 5.46% | 8.6% |
| Minimum lock in period | 3 years | 15 years | 5 years | 5 years | 5 years | 5 years | 5 years | 21 years** |
# Long Term Capital Gains Tax has been imposed on Equities after 31st Jan 2018. Gains upto 31st Jan 2018 are tax exempt for Individual and HUF investors.
* Average returns of the last 10 years have been considered.
** 50% of the amount can be withdrawn once the daughter attains 18 years of age. The investment can be started anytime till the daughter reaches 10 years of age.
The graph below shows that an investment of ₹ 1.5 lakhs every year for 15 years @13% p.a. invested in an ELSS accumulates to ₹ 68.5 lakhs as against the next best investment option of ULIPs# which accumulate to only ₹ 48 lakhs.
Thus, an investor with a long term view should choose ELSS as a tax saving instrument, rather than investing in other lower-return generating instruments.