When considering tax-saving investments in India, Equity Linked Savings Scheme (ELSS) mutual funds are a prominent option worth exploring. These funds are equity-oriented and offer the dual benefit of potential long-term capital appreciation and tax savings. 

In this guide, we will delve into the features, benefits, and considerations of investing in ELSS mutual funds.

What are ELSS mutual funds?

ELSS mutual funds are a type of equity mutual fund that primarily invest in equities and equity-related instruments. What sets them apart is their eligibility for tax deductions under Section 80C of the Income Tax Act. 

Features of ELSS Mutual Funds

Let’s take a look at some of the top features of ELSS mutual funds, which will also help you compare them with other mutual fund options:

1. Tax Benefits Under Section 80C

ELSS mutual funds offer tax benefits in the form of deductions. Under Section 80C of the Income Tax Act, you can claim deductions of up to ?1.5 lakh per financial year from your taxable income.

2. 3-Year Lock-In Period

One of the defining features of ELSS is the 3-year lock-in period. This mandatory holding period encourages long-term investing and disciplined financial planning. During this period, you cannot redeem your investment.

3. Equity-Oriented Investments

ELSS funds allocate a minimum of 80% of their assets to equities, providing market-linked returns. The performance of these funds is closely tied to the equities or stocks in their portfolio, offering the potential for significant capital appreciation over time.

4. Long-Term Capital Gains Tax

Upon redeeming units of your ELSS investment after the 3-year lock-in period, you are subject to a 10% long-term capital gains tax on gains exceeding ?1 lakh. Gains of up to ?1 lakh are exempt from tax.

Also Read - Comparing ELSS Mutual Funds Returns Over the Years

Should You Invest in ELSS?

Investing in ELSS requires you to carefully consider your risk appetite and financial goals. Since ELSS funds are linked to the stock market, they can be volatile. However, their potential for high long-term returns makes them attractive for wealth creation.

The mandatory 3-year lock-in period encourages you to invest with discipline and focus on long-term planning. ELSS can be particularly beneficial for those who have to pay taxes, as it offers tax deductions. Compared to traditional savings schemes like Public Provident Fund (PPF) or National Savings Certificate (NSC), which have longer lock-in periods and generally lower returns, ELSS funds can outperform due to their equity exposure and potential to generate higher returns in the long run.

Conclusion

If you are considering ELSS mutual fund investment to diversify your portfolio, do weigh in the risks involved. Since these funds primarily invest in equities, their returns are prone to market volatility. To gain a broader understanding of mutual funds and other investment avenues, you can also explore resources available on Sharekhan Knowledge Center.