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.
- 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 |
| ELSS | 3 years | High |
| PPF | 15 years | Low |
| Fixed Deposits | 5 years | Low |
| NPS | Till retirement | Moderate |
| NSC | 5 years | Low |
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% |
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