While there are multiple tax saving options in India, ELSS or Equity Linked Savings Scheme has become the most popular among retail investors as:
- ELSS provides superior returns compared to PPF/ Tax Saving Bank FDs etc &
- ELSS has the shortest lock-in period of 3 years amongst other traditional tax saving options.
Today, we will understand what are ELSS Mutual Funds and how to grow your wealth while saving taxes using ELSS.
In this article:
- What are ELSS Mutual Funds?
- Benefits of ELSS Mutual Funds?
- When is the best time to invest in ELSS Mutual Funds?
- Comparison between ELSS and the other Tax-Saving Instruments
- How to calculate returns on ELSS Mutual Funds?
What are ELSS Mutual Funds?
ELSS or Equity Linked Saving Scheme is an open-ended equity mutual fund that invests upto 80% of its corpus in equities i.e. stocks.
ELSS Mutual Funds are popularly known as Tax Saving Mutual Funds as investment upto Rs 1.5 Lakhs is exempt from tax under section 80C of the Income Tax Act, 1961.
Benefits of Equity Linked Saving Scheme (ELSS)
1. Shortest Lock-in period
Compared to other popular tax saving options like Tax Saving FD or PPF, ELSS Mutual Funds have the shortest lock-in period of three years only.
2. Inflation- beating returns
Since ELSS Mutual Funds invest 80% of their corpus in equities, they have the potential to deliver high inflation-beating returns.
3. Helps in saving tax
ELSS provides tax benefits under Section 80C of Income Tax Act up to Rs. 1.5 Lakh every year.
Since there is a compulsory lock-in of 3 years, there is no short term capital gains tax on ELSS Funds. The long term capital gains tax of 10% is also applicable only if your capital gains exceed Rs. 1 Lakh in a financial year.
When is the best time to invest in ELSS Mutual Funds?
Many investors rush to their CAs near the end of the financial year and haphazardly invest in ELSS. This is not a good tax-saving strategy.
The best way to maximize ELSS returns is to invest during the start of the financial year and have a long-term approach.
You can invest through Systematic Investment Plans (SIPs) to get better cost-averaging.
Comparison between ELSS and the other Tax-Saving Instruments
|Tax saving option||Lock-in period||Investment Risk|
|Fixed Deposits||5 years||Low|
While ELSS Mutual Funds do carry high risk, they have delivered higher returns in the long-term. To mitigate the risk, you should hold your ELSS investments for a minimum of 5 years to generate higher inflation-adjusted returns.
[Recommended reading: Best Tax saving options in India in 2021]
Best ELSS Schemes to invest in 2021
|ELSS mutual funds||RankMF Rating||1 Year||3 Years||5 Years||Since Inception|
|Axis Long Term Equity Fund||5 Star||3.04%||7.94%||10.83%||16.07%|
|Canara Robeco Equity Tax Saver Fund||4 Star||13.85%||9.58%||11.23%||18.45%|
|Aditya Birla Sun Life Tax Relief ’96 Fund||4 Star||1.69%||1.73%||8.95%||9.83%|
|UTI Long Term Equity Fund||4 Star||7.35%||3.28%||8.34%||10.29%|
|Kotak Tax Saver Fund||4 Star||4.57%||3.87%||9.57%||10.97%|
How to calculate returns on ELSS Mutual Funds?
An ELSS calculator helps you calculate the future value of your investment. Let us understand how to calculate your future returns with a simple example:
Ms Anu decides to invest in ELSS Mutual Funds with a lump sum of INR 1.5 lakhs. She expects a 12% return from her investment and wants to hold her investment for seven years.
The formula to calculate the future value of the ELSS investment is:
FV = C(1+r)^t
‘FV’ = future value,
‘C’ = investment amount
‘r’ = expected rate of return
‘t’ = time horizon of the investment
Based on the above formula, the future value of Ms Anu’s ELSS investment is Rs 3,31,602.
There is no denying that ELSS is the best tax saving option for retail investors but identifying the best ELSS fund is similar to searching for a needle in a haystack.
Luckily, RankMF researches and ranks all the mutual funds in India and has shortlisted the best ELSS Mutual Funds for 2021 in India.
To access the list of the best ELSS Mutual Funds for 2021 in India, open a Samco Demat and trading account and get FREE access RankMF – The best mutual fund research and investment platform in India!
[Suggested reading: ELSS the best tax saving option in India]