ELSS Funds - What is Tax saving ELSS Funds, Meaning & Benefits

Equity Linked Savings Scheme Funds, or ELSS funds are very popular with new investors as they look for investment options that can offer them regular returns, help them save taxes, and ultimately generate wealth. While there are many tax-saving investment options out there, most of them have a high lock-in period. That’s where Equity Linked Savings Scheme (ELSS) funds step in. These are a type of diversified equity funds. 

In this article, we will share details on what ELSS funds are, and how you can invest in them. 

What are ELSS FUNDS?

ELSS, also known as Equity link saving schemes, are tax-saving mutual funds that invest most of their funds in equity or other equity-related financial units. ELSS funds have a lock-in period of three years and on maturity, the returns are considered as Long-term capital gains. While investing their funds in these funds, investors generally look for tax rebates, high returns, low risk, and wealth creation. One of the major reasons for investing in ELSS is that the returns from this scheme are exempted under section 80c of the Indian Taxation Act.  That is why it are also known as tax saving schemes.

List of Equity Linked Savings Schemes (on basis of Return)

Investing in an ELSS is a straightforward process and has multiple options. If you have an existing D-mat account, you can invest using it. Also, you can invest using a registrar or an agent or you can invest online through various authentic platforms. 

Features of ELSS Mutual Funds

• Diversification: One of the best features of ELSS mutual funds is that it creates a diversified portfolio to minimize the risk for the investor. The experts chose equity and other similar instruments in different fields, sizes, and industry sectors and types. 
• Equity-oriented: As the name suggests more than 80% of the total value of the investment is divided between equity and other scripts. The remaining 20% or less is invested in debts to ensure balance and stability.
• Lock-in period: ELSS mutual funds have a minimum lock-in period of 3 years. As the funds are only realized after maturity which is a minimum of three years, the returns cannot be considered short-term gains and have added tax benefits.  
• No maximum tenure: There is no definite maximum tenure for the investment in ELSS mutual funds; however the minimum period has to be three years. Once the three-year threshold is crossed, the investor can keep or withdraw the plan as per his financial needs or goals. 
• Tax exemption: As mentioned earlier, ELSS is the top choice for investors as the annual returns are deductible up to 1.5 lakhs annually under section 80C.
• Low minimum amount and SIP method: The lowest minimum amount can be as low as 500 rupees, which makes it accessible for everyone. These funds provide flexibility of investing in lump sum amounts or following the SIP method where a small monthly amount is invested.

How Does ELSS Funds Work?

ELSS funds are created by extensive market research done by financial experts to minimize the risk, maximize long-term capital and create a diversified portfolio. If an investor wants to invest the majority of his funds in equity, then ELSS mutual funds will manage the risk by selecting high-return and low-risk equity from different market capitalizations and sectors. The expert team also uses high-tech data and data analysis tools to understand long-term market movement.

The investor can start to invest as per his financial ability and can go for a lump sum amount or get a systematic investment plan to fix the amount to be invested annually or monthly. The amount will be locked in for 3 years and after that, the investor can decide to hold or liquidate the ELSS investment to avail the said tax benefits.

Benefits of Equity Linked Savings Schemes

Here are some of the benefits of investing in the best equity linked savings schemes:

• Short lock-in period: Among other tax-saving investment options, ELSS has the shortest lock-in period of three years. For example, PPF has a lock-in period of a minimum of 15 years. Hence, elss schemes are more liquid.
• Can generate high returns: Unlike other tax-saving investment options such as bank fixed deposits that generate fixed returns, ELSS depends on the performance of stocks and securities. An uptick in these investments can yield high returns for the investors.
• Tax benefits: Investments of up to Rs. 1.5 lakh can benefit from tax deductions that fall under the provisions of the Income Tax Act.
• Two investment modes: Investors can invest via two routes in the equity linked savings scheme funds: Systematic Investment Plan (SIP) and lump-sum. With SIP, one can pay in fixed installments at regular intervals (monthly, quarterly, annually). On the other side, choosing to pay a lump-sum amount allows individuals to invest the whole amount in one go.

Best 10 Equity Linked Savings Schemes 

1. Motilal Oswal ELSS Tax Saver Fund - Direct Plan - Growth

This fund is formally known as Motilal Oswal Long Term Equity Fund. The fund objective is to generate long-term capital gain from equity and equity related instruments.

The fund has delivered exceptional 1-year returns of 60.98%, indicating strong short-term performance. Its returns over 3 and 5 years also show solid growth, making it a popular choice for aggressive investors seeking high returns over a shorter duration. 

• AuM: ₹3,835.43 Cr
• Returns: 60.98% (1 Year), 40.81% (2 Years), 25.56% (3 Years), 27.60% (5 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 0.65% p.a.

2. SBI Long Term Equity Fund - Direct Plan - Growth

As one of the largest ELSS funds, SBI Long Term Equity Fund offers consistent returns across all timeframes, including a long history of performance with a solid 16.31% return over 10 years. It’s a well-established fund for investors seeking stable and long-term tax-saving investments.

• AuM: ₹27,527.24 Cr
• Returns: 50.56% (1 Year), 38.21% (2 Years), 27.19% (3 Years), 27.99% (5 Years), 16.31% (10 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 0.95%

3. SBI Long Term Advantage Fund - Series V - Direct Plan - Growth

A smaller and moderate performer compared to the other SBI fund, this scheme offers stable returns over 5 years at 23.62%. Its focus is on long-term wealth creation, but it lacks data for 10-year performance, likely due to its structure as a series-based fund.

• AuM: ₹359.93 Cr
• Returns: 49.40% (1 Year), 28.64% (2 Years), 21.05% (3 Years), 23.62% (5 Years)
• Risk: High Risk
• Fund type- Closed-ended 
• Expense Ratio - 1.02%

4. JM ELSS Tax Saver Fund - Direct Plan - Growth

This Elss fund  has a solid track record with consistent performance across all periods, especially its 10-year returns of 18.40%. It’s a good option for investors looking for tax savings in the long-term period.

• AuM: ₹173.45 Cr
• Returns: 47.90% (1 Year), 34.55% (2 Years), 23.38% (3 Years), 26.36% (5 Years), 18.40% (10 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 1.13%

5. ICICI Prudential Long Term Wealth Enhancement Fund - Direct Plan - Growth

With moderate assets under management, this fund has consistent returns over short and mid-term periods, making it a suitable option for investors looking for stability. It doesn’t have 10-year data, which may suggest it’s a relatively newer offering

• AuM: ₹43.22 Cr
• Returns: 46.38% (1 Year), 29.15% (2 Years), 24.71% (3 Years), 24.19% (5 Years)
• Risk: High Risk
• Fund type- Closed-ended 
• Expense Ratio - 0.98%

6. DSP ELSS Tax Saver Fund - Direct Plan - Growth

A large and popular fund, DSP ELSS Tax Saver offers consistent returns, including a strong 18.08% over 10 years. It’s a solid choice for conservative investors looking for steady long-term growth with tax benefits.

• AuM: ₹17,267.83 Cr
• Returns: 45.59% (1 Year), 31.19% (2 Years), 21.28% (3 Years), 25.85% (5 Years), 18.08% (10 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 0.69%

7. SBI Long Term Advantage Fund - Series III - Direct Plan - Growth

Another SBI series-based fund, this one stands out with an impressive 30.32% 5-year return, despite having a smaller asset base. It may attract investors looking for higher mid-term growth but lacks a 10-year performance history.

• AuM: ₹80.02 Cr
• Returns: 44.81% (1 Year), 28.65% (2 Years), 25.73% (3 Years), 30.32% (5 Years)
• Risk: High Risk
• Fund type- Closed-ended 
• Expense Ratio - 0.96%

8. Quant ELSS Tax Saver Fund - Direct Plan - Growth

This fund delivers outstanding performance with a very high 5-year return of 37.96%, making it a strong contender for investors seeking aggressive growth. However, it doesn’t have 10-year performance data, so it may be newer to the market.

• AuM: ₹11,065.42 Cr
• Returns: 44.45% (1 Year), 28.93% (2 Years), 25.77% (3 Years), 37.96% (5 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 0.65%

9. HSBC ELSS Tax Saver Fund - Direct Plan - Growth

HSBC ELSS provides moderate returns across the board, with a relatively cautious long-term performance of 15.36% over 10 years. It’s a suitable choice for conservative investors looking for stable growth with tax-saving benefits.

• AuM: ₹4,373.63 Cr
• Returns: 43.68% (1 Year), 30.15% (2 Years), 19.58% (3 Years), 22.40% (5 Years), 15.36% (10 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 1.10%

10. Bank of India ELSS Tax Saver - Direct Plan - Growth

Bank of India ELSS is a solid performer with a respectable 18.77% return over 10 years, showing it can deliver stable, long-term growth while offering tax savings. It’s ideal for investors looking for both stability and tax-saving potential.

• AuM: ₹1,484.56 Cr
• Returns: 43.32% (1 Year), 30.82% (2 Years), 20.24% (3 Years), 29.63% (5 Years), 18.77% (10 Years)
• Risk: High Risk
• Fund type- Open-ended 
• Expense Ratio - 0.96% 

Who Should Invest In Equity Linked Savings Schemes?

ELSS Fund is a great choice for salaried individuals and first-time investors, due to its short lock-in period.

1. Salaried Individuals:

Salaried employees get a certain amount that goes towards the Employee Provident Fund (EPF) which is a fixed-income product. So, if one wants to balance out the risks and returns on their investment, ELSS is the best option.

In addition, these equity investments are also eligible for tax deduction under Section 80C. Other schemes such as Unit Linked Insurance Plans (ULIP) offer tax benefits, they have a higher lock-in period of 15 years. On the other hand, you don’t have to commit to Equity Linked Savings Schemes. 

2. First-time Investors:

If you are new to mutual funds and investing, Equity Linked Savings Scheme Fund is an ideal choice to invest in. Equity investments require discipline and patience to stay invested for a long time, which new investors often lack. However, a lock-in period ensures that you stay invested for a long time. 

With the ELSS fund, you can make investments through SIPs, which will ensure consistent investing. Through SIP, you can also collect more units when the market is in red which will help you when the market turns green. 

How to Choose an Equity Linked Savings Scheme Fund?

You should consider the following factors to choose the best ELSS funds to invest in 2024:

Lock-In Period of the Fund:

ELSS funds come with a lock-in period, and the minimum lock-in period is three years. In simple words, the investments must be kept for a minimum of three years, with no chance of redeeming the amount before it. Thus, you must consider this factor before deciding on investing. 

Returns of the Fund:

Because ELSS funds depend entirely on the performance of stocks and underlying securities, these funds do not provide any guaranteed results. So, you must note that the investment results aren’t promised. However, a longer investment period may provide higher returns than any other tax-saving scheme.

Investment Horizon:

To gain any results from ELSS funds, you need to have a longer investment horizon such as 5 years. However, it’s up to you for how long you want to invest in these equity funds. 

How to Invest in Equity Linked Savings Schemes?

To invest in an equity linked savings scheme fund, or ELSS fund, you must go through a KYC verification first. The process requires a photo of you, a PAN Card, an Aadhar Card, and a valid proof of address. 

Once you have your KYC verification done, follow the given steps to invest in the best ELSS fund:

• Choose the equity fund that you want to invest in.
• On the official website of mutual funds, select the equity linked savings scheme that you want to invest into.
• Decide on the amount you want to invest along with the investment mode [SIP or lump-sum].
• Provide the required documents such as your PAN Card and Aadhar Card.
• Fill out the application to invest in the ELSS fund.
• Finally, pay the amount.

To withdraw or redeem your ELSS investment units, you can send a redemption request to the Mutual Fund house or your chosen investment platform. The house will then process your request and credit the amount to your bank account. 

Taxation Rules of ELSS Funds

According to the SEBI rules, here are the taxation rules on ELSS as per the Indian Taxation Act, 1961.

• Long-term Capital Gains: As there is a lock-in period of three years, all the returns are considered and taxed as long-term capital gains. According to Taxation law LTCG of 1.25 lakh in a year is taxed free and anything above that is taxed at 12.5%.
• Short-term Capital Gain: Due to a year lock no returns from ELSS mutual funds are considered as short-term capital gains.
• Rebate under section 80C: Under section 80 C an annual amount of 1.5 lakhs can be deducted as investment in ELSS mutual funds.
• Dividend on shares owned: If the investor is getting dividends on the shares owned under the ELSS mutual fund, he has to pay tax according to his income slab.
• Withdrawing before locking in period:  Although such withdrawing will not attract any penalty no tax rebates can be claimed. 

Conclusion

Although ELSS mutual funds yield high returns in the long run, you must note that these depend highly on the performance of company stocks and securities. Therefore, as mentioned in the list of ELSS funds, most of the funds that you’ll find have a high investment risk. So, it’s up to your financial preferences and choices on how much you want to invest into these equity funds.

Also Read Best ELSS Mutual Funds.

FAQs

1. What is ELSS mutual funds meaning?

The ELSS mutual funds can be classified as diversified equity mutual funds. This equity mutual fund invests a minimum of 80% of its assets in stock and equity-related securities, with another portion of the assets being invested in debt. 

2. Is equity linked savings scheme safe?

ELSS is ranked as one of the best tax saving investments despite the new tax law, which taxes long-term capital gains from ELSS. These equity-linked investments are also a great long-term option as they can provide high returns. 

3. What is ELSS and how does it work?

ELSS simply means equity-linked saving scheme. It invests most of the funds in diversified equity and similar instruments to ensure long-term wealth creation and balance risk and return.

4. Is ELSS taxable after 3 years?

There is tax saving on exiting equity linked savings schemes after 3 years. In simple words, income tax exemption is available in this up to a maximum limit of Rs. 1.5 lakh under Section 80C of Income Tax. 

5. Can I draw out my ELSS after three years?

Yes, after a three-year lock-in period, investors can withdraw their assets from the ELSS funds. The entire lump sum amount can be withdrawn after three years. However, in case of SIPs, each SIP must fulfil the three-year term. 

6. Is ELSS fully tax-free?

No, it is tax-free but the upper deductible limit is 1.5 lakh annually under section 80C.

7. What is the difference between equity linked saving schemes and mutual funds?

There is only one major difference between equity linked saving schemes and mutual funds, and that is, the tax deduction and lock-in period. For instance, ELSS would be a better option if you’re looking for an investment plus tax saving option. 

8. Is ELSS better than PPF?

If you can take risks and absorb volatility, ELSS has a much higher potential for returns in comparison to PPF. 

9. Which bank is best for ELSS?

The SBI Long Term Equity Fund offers the highest returns in the list, with returns being 26.4% in three years.

10. Who should invest in ELSS?

Equity Linked Savings Schemes are suitable for first-time investors and salaried individuals.