Equity Linked Savings Scheme (ELSS)
This page provides all the details you need to know about Equity Linked Savings Scheme (ELSS).
Table of Contents
What is ELSS?
ELSS stands for Equity Linked Savings Scheme. ELSS is an open-ended equity mutual fund with income tax benefits under Section 80C of the Income Tax Act.
ELSS invests majority of investments into equity and equity related assets and hence it is classified as "Equity" mutual fund.
ELSS is considered under "high risk, high returns" category of investments.
How does ELSS work?
Choose an ELSS fund from one of the Mutual Fund companies
Invest the lump sum amount
Your amount will be locked for 3 years
After 3 years, you can withdraw the entire accumulated amount. Or, you can leave the amount and let it grow for as long as you wish
Features of ELSS
investment into equity mutual funds
you can invest as low as Rs. 500
income tax benefits
short lock-in period of 3 years compared to other investment options (like PPF, FD, NSC, etc) under Section 80C
since investment is locked for 3 years, fund manager can take long term investment decisions and aim for more returns
no exit charges as the investment is locked for 3 years
ability to generate wealth over long term
you can remain invested and earn returns even after the lock-in period
Income Tax Benefits
Effective 01-Apr-2020, the income tax benefits will depend upon whether you choose old tax system or new tax system.
Old Tax System:
Investments up to Rs. 1.5 Lakhs in a financial year will qualify for tax deduction under Section 80C of the Income Tax Act.
Dividend received will be added to your income and it'll be taxed as per your income tax slabs.
If the dividend amount is more than Rs. 5,000, then the ELSS Funds company will deduct 10% of the dividend amount as TDS.
There is no long term capital gains (LTCG) tax on profits up to Rs. 1 Lakh. After that, any profit is taxed at 10% (without indexation).
New Tax System:
No income tax benefits. The investment amount won't get any deduction benefit under Section 80C of the Income Tax Act.
Dividend received will be added to your income and it'll be taxed as per your income tax slabs.
If the dividend amount is more than Rs. 5,000, then the ELSS Funds company will deduct 10% of the dividend amount as TDS.
There is no long term capital gains (LTCG) tax on profits up to Rs. 1 Lakh. After that, any profit is taxed at 10% (without indexation).
Drawbacks of ELSS
High risk investment
ELSS returns is not guaranteed and it may vary based on Market conditions
Investment is locked for 3 years. You can't withdraw before 3 years. No partial withdrawal or pre-mature withdrawal options
Once invested, you can't switch to another fund during the lock-in period of 3 years
Investment Limits
Minimum investment amount is Rs. 500.
There is no limit on maximum investment amount. You can invest as much as you can.
Note that tax deduction is available up to Rs. 1.5 Lakhs in a financial year. Anything invested more than this will not get any tax deduction benefits. However, the amount will be invested and you can gain returns.
Maturity Period
Maturity period is 3 years.
After 3 years, You can do one of the following
withdraw the entire accumulated amount and close the account
leave the amount invested and let it grow further for as long as you want. You can withdraw whenever you need either in full or in parts
is ELSS returns guaranteed?
No. ELSS returns is not guaranteed and it may vary based on Market conditions.
SIP in ELSS
Like other mutual funds, ELSS scheme also offers SIP option.
You can opt for SIP route to invest in ELSS and you will get all the advantages of SIP method.
But, note that every installment of SIP will get locked for 3 years.
For example, amount invested in Apr-2016 will be matured in Apr-2019. Amount invested in May-2016 will be matured in May-2019. Amount invested in Jun-2016 will be matured in Jun-2019 and so on.
Investment Options in ELSS
When you choose a ELSS fund, you can opt for one of the following options.
Growth
Dividend Payout
Earlier, there was a "Dividend reinvestment" option, but it was discontinued.
The details about each option are given below.
1) Growth Option:
As the name implies, growth option aims for capital appreciation over long term.
The number of units that you bought will remain the same till you sell them.
NAV of the scheme will increase or decrease depending upon the performance of the scheme.
In these schemes, you will get money only when you sell the units.
This is suitable for those who expects growth over long term and not in need of money during short term.
2) Dividend Payout Option:
Dividends are nothing but the profits made by the Mutual Fund scheme.
This option pays out dividends to investors from time to time.
But, the dividend amount and the frequency of dividends are not guaranteed.
The number of units will remain the same but the NAV of the scheme comes down after the dividends are declared.
This is suitable for those who expect to receive income flow on a regular basis.