What Are ELSS Funds and How Do They Work?

You would have often stumbled across the investment term ELSS funds several times in your life. You would have even heard it from your friends or colleagues who go on and on about how ELSS investments have helped them reach their financial goals. Are you unsure about what exactly ELSS is? Don’t worry. We have got you covered. This article aims to explain ELSS funds and some of the features of ELSS funds. 

What are ELSS funds?

ELSS funds, short for Equity-Linked Savings Schemes are mutual fund schemes that invest at least 80% of their investment portfolio in stocks of equities and equity-related securities. As these mutual funds are a part of Section 80C investments, they offer a tax deduction of up to Rs 1.5 lac under section 80C of the Income Tax Act, 1961. As a result, these mutual funds are commonly referred to as ELSS tax saving mutual funds. ELSS mutual funds are quite popular among investors as they provide the dual benefits of wealth creation prospects and tax-saving benefits to investors. These tax saver mutual funds have a compulsory lock-in tenure of three years. This also happens to one of the shortest lock-in tenure as compared to other tax-saving investments such as National Savings Certificate (NSC), Public Provident Fund (PPF), and Bank fixed deposits (FD) that have a lock-in duration of 5 years, 15 years, and 5 years respectively.

Features of ELSS mutual funds

Following are some of the features of ELSS tax saving mutual funds:

1. ELSS funds are mandated to invest at least 80% of their assets in equities by the Indian mutual funds’ regulator – SEBI (Securities and Exchange Board of India).
2. Investors are mandated to stay invested in ELSS mutual funds for a minimum of three years. However, experts suggest staying invested for a longer duration as this allows the equities to perform at their maximum potential. Experts further suggest individuals to link their ELSS investments with their long-term investment goals so that they are not tempted to exit the markets during market turbulence.
3. Gains of ELSS investments are subject to just long-term capital gains (LTCG). This is because due to the mandatory lock-in period of three years, there is no scope for short-term capital gains (STCG). Just like other equity funds, LTCG on ELSS investments are charged at 10% per annum for capital gains exceeding Rs 1 lac. Long-term capital gains up to Rs 1 lac on equity funds (thus, even of ELSS investments) are exempt from any tax.
4. Just like any other types of mutual funds, ELSS mutual funds are custom-made to specific level of risks and financial objectives. 
5. All Section 80C investments are eligible for a tax-deduction of up to Rs 1.5 lac per annum. The same applies for ELSS mutual funds as well. As an investor, you can save up to Rs 46,800 on tax-saving investments each year, provided that you belong to the highest tax slab. 

How to invest in ELSS funds?

Just like any other mutual funds, you can invest in ELSS either through a systematic and regular approach of investment with SIPs (systematic investment plan) or making a one-time investment with lumpsum investment. However, note that if you make an SIP investment, each SIP installment would have to complete the mandatory lock-in period of three years. For instance, if you start an SIP of Rs 5,000 in ABC ELSS funds on 1st March 2015, then you would be able to withdraw just the first instalment of Rs 5,000 on 1st March 2018. Similarly, you would be able to withdraw the second installment of Rs 5,000 on 1st April 2018 and the third installment of Rs 5,000 on 1st May 2018, and so on. Happy investing!