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What is an ELSS?

ELSS or Equity Linked Savings Scheme is a type of mutual fund scheme which helps in saving tax on investments made up to ₹1.5 Lacs, (since it is eligible for deduction along with the other prescribed investments) under Section 80C of the Income-tax Act, 1961.
Investing in ELSS for capital appreciation is just like investing in any other equity oriented mutual fund scheme with additional benefit of tax savings. Also, these schemes come with a lock-in period of just 3 years (lowest lock-in period for any taxing saving instrument, under Section 80C of the Income-tax Act,1961).

For example, Rajesh has a gross annual income of ₹12,00,000. He invests a total of ₹1,50,000 in ELSS schemes. Therefore his taxable income is reduced to ₹10,50,000. Since Rajesh falls under the tax bracket of 30%, he is able to save ₹46,800 (including cess @4% and excluding surcharge)*.

Why invest in ELSS?

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Save tax on investments

Save upto ₹46,800 p.a. of tax under Section 80C of the Income-tax Act, 1961, assuming the highest tax bracket of 30% is applicable (including cess @4% and excluding surcharge)*.

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Capital Appreciation

As the name suggests, ELSS funds are equity oriented and equities tend to provide better returns (inflation adjusted) over a long period of time.

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Shortest lock-in period of just 3 years

Compared to the other prescribed investments under tax saving category, under section 80C of Income tax act, 1961.

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Ease of investing

Like any other mutual fund scheme, investment in ELSS can be done as lumpsum or via SIP i.e. systematic investment plan, which makes staggered investing possible.

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Transparency

Each month every Asset Management Company (AMC) releases the scheme’s portfolio and many other details to let investors know where the scheme has invested.

ELSS Vs. Other Tax Saving Options

HDFC Mutual Fund Table

$Premature withdrawal is allowed subject applicable charges or conditions.
@Partial withdrawal is allowed after 6 years subject to certain conditions.

Source:
# https://www.indiapost.gov.in/Financial/Pages/Content/Post-Office-Saving-Schemes.aspx
^ Latest 5 year term deposit rates (for deposits below Rs. 2 crores) declared by State Bank of India

*Tax calculations shown above are as per income tax slabs for FY 2020-21 applicable for an individual assessee below the age of 60 with taxable income above Rs. 10 lakh but less than Rs. 50 lakh. The calculation is inclusive of cess. The same is for illustrative purposes only.

How to invest in ELSS?

Just like any other mutual fund scheme, investment in ELSS can be done as lumpsum or via SIP i.e. Systematic Investment Plan, which makes staggered investing possible

  • Lumpsum: It is a one-time investment which can be made. There is no limit to the number of lumpsum investments however; investment must be in multiples of ₹500. Minimum investment amount under this scheme can vary across various Mutual Funds.

  • SIP i.e. Systematic Investment Plan: Every month/quarter a specific amount (decided by the investor at the start of SIP) is deducted from the investor’s bank account and invested in the chosen ELSS scheme. Minimum investment amount in this mode can be as low as ₹500/month.