Tax saving mutual funds: Equity Linked Savings Scheme

Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). 

This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits. 

With the financial year coming to a close and sentiments towards equity markets turning positive, investments in ELSS are on the rise. Let’s understand more on Equity Linked Savings Schemes.

Features of ELSS

An ELSS is a diversified equity mutual fund which has a majority of the corpus invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns from the equity markets. 

This type of mutual fund has a lock in period of 3 years from the date of investment. This means if you start a Systematic Investment Plan in an ELSS, then each of your investments will be locked in for 3 years from the respective investment date. 

Investors can exit ELSS by selling it after 3 years.

Advantages of ELSS over other tax saving instruments

Compared to traditional tax saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and bank fixed deposits; the lock in period of an ELSS fund is much lower. 

While ELSS investment is locked in for 3 years, PPF investments are locked in for 15 years, NSC investments are locked in for 6 years, and bank fixed deposits eligible for tax deduction are locked in for 5 years. As ELSS is an investment in equity markets and investing in this for a long term can give you better returns compared to other asset classes over the long term. 

You can also opt for SIP investments, which bring about discipline in regular investing. You can also get income from your investment amount in the lock in period if you opt for dividend schemes.