What is ELSS and reasons to invest in ELSS funds?

Equity Linked Savings Schemes (ELSS) are a type of mutual fund investment designed to help individuals save on income tax. Commonly referred to as tax-saving funds, ELSS allows investors to grow their wealth while benefiting from tax deductions under the Indian Income Tax Act.

Section 80C of the Income Tax Act permits taxpayers to invest up to Rs 1.5 lakh annually in specified financial instruments and claim these investments as deductions from their taxable income. This means that by investing in ELSS, you can reduce your taxable income by up to Rs 1.5 lakh, effectively lowering the amount of income tax you owe. 

Here are some of the key features of an ELSS fund

• ELSS funds invest a large percentage of their portfolio in equity.
• They have a compulsory lock-in period of 3 years, which is the shortest amongst all tax saving instruments.
• You enjoy the dual benefits of capital appreciation from investments in equity along with tax-saving.
• You can opt for dividend pay-outs if you wish to receive regular income or go with the growth option for capital appreciation
• ELSS Mutual Funds do not have any entry or exit load.
• Good ELSS Funds generate returns in the range of 10-12 per cent in the long run, among the highest in the tax-saving category of instruments. However, ELSS also comes with some risk, inherent in equity investments

You can invest in ELSS the same way that you invest in any mutual fund. The easiest way is through an online investment services account. You can invest either as a lump sum or via the SIP (systematic investment plan) route.

• SIP ensures regularity and discipline and reduces the risk to capital
• You can invest as little as Rs 500 in an ELSS fund.
• While you can claim tax benefit only up to Rs 1.5 lakh, you are free to invest as much as you like.

As is evident, ELSS funds fare far better than other tax saving instruments, with the lowest lock-in period (3 years) and better returns. They are also tax-efficient.

If you are seeking a good tax-saving investment option, ELSS Mutual Funds are a great choice.

Read more on how to invest in Mutual Funds.

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*Mutual Funds are subjected to market risks. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.