Indian tax payers can claim deductions of up to Rs 150,000 each financial year from their gross taxable income (if they are following the old tax regime) by investing in various schemes approved under Section 80C. Under Section 80C, the risk free investments options are Public Provident Funds (PPF), National Savings Certificates (NSC), bank tax saver funds, Life insurance premiums, etc.
ELSS schemes offered by mutual funds also qualifies under Section 80C, but being a diversified equity fund, it is bit risky as the investments are made in equities or equity linked instruments. Like ELSS funds, another investment option, unit linked insurance plans are also subject to market risks.
ELSS funds are like any other diversified equity mutual fund schemes and comes with a lock-in period of 3 years. ELSS mutual fund investment has mandate to diversify across different industries, sectors and market capitalizations. One can start investing in ELSS tax saving mutual funds even with a small amount of Rs 500 only. There is no upper limit of investments in ELSS funds even though the limit is Rs 150,000 in a financial year.
You can invest in ELSS tax saving mutual funds by way of one-time investment or through SIP. Please note that in case of SIP investing, each SIP installment is locked-in for 3 years from their respective investment dates.
Let us now compare ELSS funds with other 80C investment options –
| Scheme | Tenure | Interest rate / Returns | Risk |
| PPF | 15 years | 7.1% | Risk-free |
| NSC | 5 years | 7% | Risk-free |
| 5 year tax saver FD | 5 years | 5.4% | Risk-free |
| Traditional life insurance plans | Minimum policy tenure of 10 years | 5 – 7% (XIRR of typical endowment plans) | Low risk |
| ELSS Schemes | 3 years lock-in period, redeemable partially of fully thereafter | 14.19% CAGR (3 year category average returns) | High to very high risk |
*ELSS category average returns as on 25/02/2023)
Why invest in ELSS?
- Historically equity as an asset class has given the highest return. If you check the NIFTY 50 TRI returns in the last 20 years, it has given 16.55% annualized returns (Returns as of 24/02/2023). For example, an investment of Rs 10,000 made on 24/02/2003 will now (on 24/02/2023) be worth Rs 214,293.
- Fund managers can take long term conviction calls in ELSS portfolio due to the 3 years lock-in period. This may also mean that returns can be more as there will not be much redemption pressure.
- ELSS mutual fund schemes has only 3 years of lock-in period, thus it is the most liquid investment option u/s 80C.
- Tax saving mutual funds are also tax efficient as the capital gains of up to Rs 1 lakh in ELSS is tax exempt in a financial year and thereafter, taxed at only 10% + surcharge.
- If you are looking for growth of capital, tax saving as well as wealth creation over a long period of time, then ELSS funds can be the best choice.
- Investors in the highest tax bracket, can save taxes up to Rs 46,800 per year by investing in ELSS mutual funds.