ELSS - Equity Linked Savings Scheme

Overview:

ELSS or Equity Linked Savings Scheme is a financial product that provides investors with tax benefits under Section 80C. ELSS are mutual funds offered by fund houses and are handled by experienced fund managers. ELSS schemes are open ended, that is, investors can subscribe to the fund at any day. NAV or the price of the fund is declared on every business day.

Why is it good?

ELSS mutual funds have gained popularity in recent times due to many benefits they offer over other 80C tax savings alternatives, such as PPF, NSC, life insurance, tax saving fixed deposits, etc.

Short Lock-in Period ->

All tax-savings instruments have a lock-in period and withdrawal is not allowed during this period. FD and NSC have a lock-in period of 5 years, while complete withdrawal of PPF can be performed only after 15 years.  In ELSS, lock-in period is just 3 years and if you want you have the option of staying invested for a longer period.

Tax treatment ->

As per recent changes introduced in Budget 2018, LTCG (long term capital gains) tax is being implemented in case of ELSS as well as other equity investments. If an ELSS investor decides to sell his/her units, if total gains from equity schemes held for a year or more exceed Rs. 1 lakh, the incremental amount will be subject to a LTCG tax of 10% without indexation benefit. Additionally, all gains up to the limit of the ELSS NAV as on 31st January 2018 would be exempt from the new LTCG tax. However any gains above that limit are subject to the 10% tax rate over the Rs. 1 lakhs LTCG limit.

Systematic Investment Plan (SIP) Option ->

In case of tax savings financial instruments such as tax-saver FD, only lump sum deposits are acceptable, while the number of transactions is limited to a maximum of 12 transactions in a year in case of PPF account. In ELSS, you can invest through systematic investment plan. There is currently no limit on the number of SIP you can operate simultaneously or the amount invested in ELSS during a financial year. But do keep in mind that ELSS investments provide tax benefits only up to the prescribed limit of Rs. 1.5 lakhs as per Section 80C.

Dividend and Growth Option of investment ->

In case of tax saving instruments such as tax saver FDs, NSC and PPF, you cannot get access to your deposits during the lock-in period. On the other hand, the investor has the choice of opting for the dividend option when investing in an ELSS. Thus, if the fund declares a dividend payout, the investor can get access to such profits even during the 3 year lock-in period. Alternately, you can opt for the growth option so that you can withdraw the amount invested plus profits as a lump sum after the completion of the lock-in period.

Investment	Returns	Lock-in Period	Tax on Returns
5-Year Bank Fixed Deposit	6% to 7%*	5 years	Yes
Public Provident Fund (PPF)	7% to 8%*	15 years	No
National Savings Certificate (NSC)	7% to 8%*	5 years	Yes
National Pension System (NPS)	8% to 12%**	Till Retirement	Partially Taxable
ELSS Funds	15% to 18%**	3 years	Partially Taxable

*   Depends on current rate of interest

** Depends on market fluctuations

Conclusion:

PPF and NSC are popular tax savings instruments issued by the Government of India. Public provident fund (PPF) has a lock in period of 15 years; National savings certificate has a lock in period of 5 years in comparison to ELSS which has a lock in period of 3 years only. PPF and NSC have a fixed rate of return somewhere close to 7.5% to 8% whereas return in ELSS varies depending upon the market fluctuation, however past performance of some ELSS funds shows an average return of 15% to 25% over a period of time. It must be noted that being equity oriented instrument, risk is also high in ELSS instrument as compared to PPF or NSC which are debt instruments.