Equity-linked savings scheme (ELSS) funds, commonly known as tax-saving mutual funds, offer investors a unique combination of tax benefits and potentially higher returns by primarily investing in large-cap stocks.
What sets ELSS apart from other tax-saving instruments like Public Provident Funds (PPF) and National Savings Certificates (NSCs) is its relatively higher risk profile. Despite this, ELSS funds have historically delivered attractive returns, outperforming traditional tax-saving options such as PPF or NSCs.
As of December 4, 2023, the ELSS category exhibited an average return of 20.19%, surpassing returns from the previous year. Under Section 80C of the Income-Tax Act (ITA), 1961, investors can claim a tax deduction of up to Rs. 1.5 lakh for investments in ELSS under the old tax regime.
However, those opting for the new tax regime are ineligible for this deduction. Investors have the flexibility to invest beyond Rs. 1.5 lakh, but the excess amount does not qualify for tax benefits under Section 80C. The minimum investment amount for ELSS is Rs 500, with subsequent investments made in multiples of Rs 500.
As mandated by the Securities and Exchange Board of India (SEBI), ELSS funds must allocate at least 80% of their assets to equity. The remaining 20% can be invested in cash, debt, or money market instruments. Funds have the flexibility to invest in large-cap, multi-cap, or mid-cap stocks, providing diversification within the equity segment.
ELSS funds come with a lock-in period of three years, during which investors cannot sell their investments. In comparison, tax-saving fixed deposits have a five-year lock-in period, while PPF has a 15-year maturity period, and NSCs have a lock-in period of five years.
Due to the three-year lock-in period, ELSS funds often generate long-term capital gains (LTCGs). LTCGs of up to Rs 1 lakh per year are tax-free, with gains exceeding this threshold subject to an LTCG tax of 10%. The category average return for ELSS funds reflects their potential for generating attractive returns over various investment horizons.
With a one-year average return of 20.19%, a three-year average return of 21.44%, and a 10-year average return of 17.39%, ELSS funds have demonstrated their ability to deliver consistent performance over the long term, making them an appealing option for tax-saving investments.
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