There are some mutual fund (MF) schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.

It also provides an opportunity for long term capital appreciation. An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.

Since it is an equity fund, the returns from this scheme are market determined.

Top five features of ELSS Funds

  • Tax-saving
  • Three-year lock-in period
  • Can be held even after the completion of three years
  • Offers dividend as well as growth options
  • Tax Saving instrument

Tax Treatment

The returns from an ELSS fund are tax free in your hands. The long term capital gains from an ELSS are tax free as well. This is because no tax is levied on equities that are held for more than a year. Since an ELSS falls under section 80C, you can claim up to Rs 1.50 lakh from your investment as a deduction from your gross total income.

Why prefer ELSS over other tax saving schemes

Shorter lock-in period

An ELSS has a lock-in period of only three years as compared to other tax saving instruments such as Tax Saving Fixed Deposit which has lock-in period of five years and a NCS which has a lock-in for six years.

Long term capital gains

Since an ELSS fund invests in equities, and is dynamically managed by a professional fund manager; it has the potential to provide long term capital gains compared to other passively managed asset classes.

Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route.

Challenges

One needs to bear in mind that the returns of the ELSS schemes are determined by the performance of the equity market.

Equity Linked Savings Schemes

The Equity Linked Savings Scheme, or ELSS, is a type of mutual fund (MF) that was developed specifically to save you money on taxes. The investments you make in an ELSS are tax-deductible under Section 80C. It also offers the possibility of long-term capital growth.

An ELSS fund manager invests in a diversified portfolio that consists mostly of high-risk equities and equity-related securities with the potential to produce large returns. Because it is an equity fund, the scheme's returns are set by the market.

Top five features of ELSS Funds

  1. Tax-saving
  2. Three-year lock-in period
  3. Can be held even after the completion of three years
  4. Offers dividend as well as growth options
  5. Tax Saving instrument

Tax Treatment

Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. One can plan effectively and invest in ELSS through the SIP (Systematic Investments Plans) route.

Why prefer ELSS over other tax-saving schemes

Shorter lock-in period

In comparison to other tax-saving vehicles such as the Tax Saving Fixed Deposit, which has a lock-in duration of five years, and the NCS, which has a lock-in term of six years, an ELSS has a three-year lock-in period.

Long term capital gains

When compared to other passively managed asset classes, an ELSS fund that invests in equities and is dynamically managed by a professional fund manager has the potential to produce long-term financial gains.

Systematic Investment Plan (SIP)

The Systematic Investment Plan (SIP) is a mutual fund investment vehicle that allows investors to invest in modest amounts on a regular basis rather than in large lump sums. SIPs (Systematic Investment Plans) are a good way to plan ahead and invest in ELSS.

Challenges

It's important to remember that the performance of the equity market determines the ELSS schemes' returns.