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Equity linked saving scheme as tax saving investment

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An ELSS fund or an equity-linked savings scheme is the sole type of mutual fund for tax deductions under the provisions of section 80C of the Income Tax Act, 1961. A tax refund of up to Rs 1 50,000 can be claimed and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.
Equity-linked saving scheme mutual funds’ asset allocation is mainly towards equity and equity-linked securities such as listed shares. Although, they may have some exposure to fixed-income securities as well. Moreover, these funds come with a lock-in period of just three years, the shortest among all section 80C investments.

Features of equity-linked saving scheme funds
The following are the main features of equity-linked savings scheme mutual funds:

  • Tax deductions are offered up to Rs 1 50,000 a year under section 80C provision.
  • They have a lock-in time of three years, and there are no provisions to make a premature exit.
  • Investment of any amount in an equity-linked savings scheme is possible. There is no upper limit, while the minimum investable amount varies across fund houses.
  • Equity-linked savings scheme funds are the only tax-saving investment with the potential to offer inflation-beating returns
  • Investing in equity-linked savings scheme funds gives you the twin benefits of tax deductions and wealth creation.
  • The portfolio of an equity-linked savings scheme fund mainly consists of equities, while they have some exposure towards fixed-income securities.

Factors to be considered before investing in ELSS

  • Lock-in period: Equity-linked savings scheme mutual funds come with a lock-in period of three years. Investments are mandatorily locked in for three years from the date of acquisition, and your holdings cannot be redeemed until the end of this period.
  • Investment horizon: A longer than five years investment horizon is required to consider investing in ELSS funds. The equity exposure of equity-linked savings scheme funds requires you to have a longer investment horizon to mitigate market volatility.
  • Returns: ELSS funds do not provide guaranteed returns as they depend entirely on the underlying securities’ performance. Although, having an investment horizon of longer than five years can give higher returns than any other tax-saving investment option.

Benefits and drawbacks of ELSS 



The lock-in period is set at just three years, which is much lower when compared with other MF options.

It is rather hard to determine the fund in which you want to make your investment.

The returns provided by ELSSs are considerably high.

The documentation needed to invest in an ELSS is a lot.

The earnings through an ELSS post the lock-in period are exempt from tax.

The returns offered by ELSSs are not guaranteed, considering it is an equity-based MF subject to market conditions.

There is no cap or restriction on how much you can invest in an ELSS.

Premature withdrawals are not allowed.

The power of compounding essentially helps investors multiply their principal amount and earn impressive returns.

Indians who live in the US or Canada cannot invest in most mutual funds.

Comparison of ELSS with other tax-saving instruments
There are various tax-saving schemes to help you collect wealth over time, such as FD, PPF and NSC, to name a few. But the returns proposed by these schemes are limited. This is where ELSS stands out. Its returns usually are higher, especially when the markets are bullish. Combined with a lock-in period of just three years, it makes ELSS mutual funds the prime tax-saving investment option. As a result, even the post-tax returns of ELSS are much more appealing than any other tax-saving investment option.



Lock-in period

Tax on returns

5-year bank fixed deposit

4% to 6%

Five years


Public provident fund (PPF)

7% to 8%

Fifteen years


National savings certificate

7% to 8%

Five years


National pension system (NPS)

8% to 10%

Till retirement

Partially taxable

ELSS funds

15% to 18%

Three years

Partially taxable

Time of investment in ELSS
Many investors invest in equity-linked saving scheme funds to save tax at the end of the financial year. However, this may not be considered a good strategy. Tax saving is a crucial consideration for investing in these funds. But it must be the main reason to consider investing in them.

The most acceptable way to escalate benefits on such funds is to invest with a long-term approach. So, recognize your investment goals at the commencement of the year and invest appropriately through systematic investment plans (SIPs). Investing regularly all year round can help diminish your exposure to market volatility and build wealth over time.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the equity-linked saving scheme, kindly contact us.


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