ELSS a review in brief

CA Pallav Singhania (IT System Auditor) (33262 Points)

11 January 2016

What is ELSS?

Simply put, ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act, and offers the twin-advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years.

Why should one invest in an ELSS?

ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.

Features / Benefits of Investing in ELSS Mutual Funds:

ELSS Mutual Funds are one of the best tax saving options under Section 80c. Infact, ELSS MF scheme is the only pure investment option under Section 80C through which investors can take exposure to equity markets.
ELSS Tax saving mutual funds come with a lock-in period of three years, the lowest among all the tax saving options that are available under Section 80C. (PPF’s lock-in period is 15 years, Tax saving Bank Fixed Deposit’s is 5 years, National Saving Certificate’s is 5 years etc.,)
ELSS falls under EEE tax rule (Exempt-Exempt-Exempt). No taxes are applicable during Contribution-Accumulation-Withdrawal phases. Investments get tax deduction under Section 80C, so you don’t have to pay tax on the amount invested in the ELSS fund. The capital gains generated by the fund are also exempt from tax as the investments are not withdrawn. Finally, withdrawals are also tax-free because there is no tax payable on long-term capital gains from equity-oriented mutual funds. The Employee Provident Fund and the Public Provident Fund are the only other investment options that enjoy the EEE tax treatment.
Dividends declared on these schemes are also tax free in the hands of unit-holders (investors)
You can start a SIP in ELSS MF with a minimum investment (as low as Rs 500). Unlike an life insurance, you don’t have to commit multi year investments.
There is no upper limit for investment in ELSS but the maximum tax benefit is limited to Rs 1 lakh under Section 80C.