ELSS

What is ELSS?

ELSS is a mutual fund that mainly invests in stocks and related assets. It helps you save on taxes while potentially earning better returns compared to traditional savings. Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

Key Features of ELSS

• Lock-in Period: Your investment is locked in for 3 years, the shortest among tax-saving options. You can't withdraw funds during this time.
• Equity Exposure: At least 80% of the fund is invested in equities, offering a chance for substantial growth.
• Tax Benefits: You can claim tax deductions up to ₹1.5 lakh per year under Section 80C, reducing your taxable income.
• Market-linked Returns: Returns depend on stock market performance and are generally higher than fixed deposits (FDs) or the Public Provident Fund (PPF).

Why Invest in ELSS?

1. Higher Return Potential: ELSS funds have historically delivered an average return of around 15% over the long term.
2. Tax Efficiency: Long-term capital gains (LTCG) up to ₹1 lakh are tax-free; anything above that is taxed at 10%.
3. Wealth Creation: Besides saving tax, ELSS can help build wealth for long-term goals like retirement or children’s education.
4. Investment Flexibility: You can invest through a Systematic Investment Plan (SIP) or as a lump sum, depending on your preference.
5. Diversification: ELSS funds invest across different sectors, reducing the risk associated with individual stocks.

Things to Consider Before Investing in ELSS Scheme

1. Market Risk: Like all equity investments, ELSS is subject to market ups and downs.
2. Investment Horizon: Be ready to stay invested for at least 3 years and ideally longer to ride out market fluctuations.
3. Financial Goals: Ensure ELSS aligns with your financial goals and risk appetite.

How are ELSS funds compared to other tax-saving instruments like PPF or FDs?

When comparing Equity Linked Savings Schemes (ELSS) to other tax-saving instruments like Public Provident Fund (PPF) and Fixed Deposits (FDs) in India, several key factors come into play, including returns, risk, lock-in periods, and tax implications. Here’s a detailed comparison:

Feature	ELSS	PPF	Fixed Deposits (FDs)
Type	Equity mutual fund	Government-backed savings scheme	Bank savings product
Safety/Risk	High risk (market-linked)	Very high safety (government guaranteed)	Low risk
Lock-In Period	3 years	15 years	5 years
Returns	Market-linked, typically 15-16%	Fixed rate set by government (currently around 7.1%)	Fixed rate (typically around 6-7%)
Tax Benefits	Tax deduction under Section 80C up to ₹1.5 lakh; LTCG tax on gains above ₹1.25 lakh at 12.5%	Tax deduction under Section 80C; interest earned is tax-free	Tax deduction under Section 80C; interest is taxable
Liquidity	Moderate (after lock-in period)	Low (partial withdrawals allowed after 5 years)	Moderate (premature withdrawal penalties may apply)
Investment Horizon	Medium to long term	Long term	Short to medium term

Which one to choose?

• ELSS: Ideal if you seek higher returns and can handle market risk over a medium to long-term period.
• PPF: Best for conservative investors who prefer safe, long-term savings with fixed returns.
• FDs: Suitable for those looking for low-risk, fixed returns, though growth potential is limited.