Tax-Saving Mutual Funds (ELSS): Tax Benefits, Lock-In Period And Other Details

The equity-linked saving scheme (ELSS) is a type of equity fund which provides tax benefits under Section 80C of the Income Tax Act. One can invest up to Rs 1.50 lakh in ELSS funds in a financial year and can get tax benefit on that. However, you can also invest more than Rs 1.50 lakh in an ELSS mutual fund in a financial year but the excess amount over Rs 1.50 lakh won't qualify for tax benefit under section 80C. ELSS mutual funds invest more than 65 per cent of their corpus in equity or equity related instruments. These funds have a lock-in period of 3 years, which means the amount you put in an ELSS mutual fund cannot be withdrawn before 3 years.

Compared to other tax saving instruments, ELSS has a lower lock-in period. Other investment products that provide tax benefit under Section 80C like insurance, PPF, National Savings Certificate, employee's provident fund (EPF) have a minimum lock-in period of 5 years.

Better returns

ELSS mutual funds primarily invest in equity and equity related instruments so they offer better return compared to other tax-saving instruments like PPF, NSC and EPF. "With returns from traditional tax-saving instruments such as PPF, NSC and Traditional Life Insurance falling heavily in recent times, investors would be making a wise move by harnessing the power of equities by investing into ELSS funds," said Harsh Gahlaut, CEO of FinEdge, a financial advisory.

ELSS mutual funds also have an added advantage as they fall under 'EEE' category, which means the amount you invest in an ELSS fund, the returns/dividends and the maturity amounts are tax exempted. However, in some other tax-saving avenues like NSC, the amount you invest is only tax-free but the returns are not.

Invest via SIP

Financial planners suggest that investments in an ELSS fund through SIP or Systematic Investment Plan is better compared to lump-sum investment. "Systematic Investment Plans in ELSS funds provide investors with the convenience of making affordable monthly tax saving investments, and averaging the cost of their units - thereby reducing risks-in the process," Mr Gahlaut added.