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Why ELSS can be the best tax saving option

Mutual fund ELSS or Equity Linked Savings Scheme is among the best investment options for tax savings under Section 80C of Income Tax Act 1961. Click here to speak to a HMRC agent.

What is ELSS Fund?

  • ELSS mutual fund in India are diversified equity mutual fund schemes.
  • Investments in ELSS mutual fund upto Rs 150,000 in a financial year are exempt from taxes under Section 80C of Income Tax Act. Investors in high tax bracket can save upto Rs 46,350 by investing up to Rs 150,000 each financial year.
  • ELSS tax saving mutual funds has a lock-in period of 3 years
  • As the ELSS has lock-in period of 3 years, the capital gains are treated as long term. The long term capital is tax free upto Rs 1 Lakh in a financial year and thereafter taxed at only 10%.

Why invest in ELSS mutual Fund

Liquidity: ELSS mutual fund schemes in India offer more liquidity compared to most tax saving investment options. Most Section 80C investment options, other than ELSS funds, have a minimum lock-in period of 5 years.

Equity as an Asset Class: ELSS fund invest in diversified equity portfolio across different sectors and market capitalization. Though tax saving mutual funds are subject to equity market risks, equities have been the best performing asset class in the long term. ELSS mutual funds as a category has given over 18%, 14% and 16% annualized returns respectively in the last 3, 5 and 10 years period (source:

Systematic Investing: Equity linked saving schemes also offers convenience of SIPs investing. Through an SIP in ELSS mutual funds in India, you will not only be able to meet your tax saving needs for the financial year, but also, over a sufficiently long period of time, create wealth. Mutual fund SIPs take advantage of market volatility and through rupee cost averaging, generate superior returns for investors compared to other schemes in the long term.

The chart below shows the wealth created by a hypothetical Rs 5,000 SIP in ELSS mutual fund scheme for a period of 20 years assuming 15% annual XIRR returns.

Observe, with a monthly SIP of just Rs 5,000 in ELSS mutual fund scheme you can accumulate a corpus of around Rs 14 lakhs in 10 years and Rs 75 lakhs in 20 years period assuming annual return of 15% XIRR. The maximum benefits of the ELSS tax saver funds are seen over a long investment horizon (longer the better). Therefore, even though ELSS mutual fund investment have a lock-in period of just 3 years, investors should plan on remaining invested longer.

ELSS mutual funds scores higher than many 80C tax saving options on multiple fronts like returns, liquidity, flexibility, tax efficiency and method of investing (like mutual fund SIP) etc.