What are ELSS or Tax Saving Mutual Funds?

As the name denotes,Equity Linked Savings Schemes (ELSS) are Mutual Fund investments in equity markets that qualify for tax exemption …

As the name denotes,Equity Linked Savings Schemes (ELSS) are Mutual Fund investments in equity markets that qualify for tax exemption under Section 80C of the Income Tax Act. A maximum amount of up to ₹1.5 lakh invested in these tax saving Mutual Fund schemes every year, can be deducted from an investor’s total taxable income.

Though other tax saving investment schemes — like the Provident Fund (PF), National Pension Scheme (NPS) and National Savings Certificates (NSC) — exist, an ELSS can offer the highest returns out of all. These higher returns are accompanied by higher risks, as the funds are invested in equity markets and are subject to market forces. Here’s a detailed look at ELSS, how it compares with other tax saving investments and why you should invest in ELSS.

Differences between ELSS and other Mutual Funds

  • An ELSS differs from other Mutual Funds since an ELSS investment (up to a maximum of ₹ 1.5 lakh every year) can be deducted from total taxable income if invested in ELSS.
  • The investments made into an ELSS have a lock-in period of three years, during which the funds can’t be withdrawn. Other Mutual Fund investments don’t have such a lock in period (except for some closed end Mutual Funds).

An ELSS has a lock-in period of three years.

  • An investment can be made once in a lump sum, or even at regular intervals after signing up for a Systematic Investment Plan (SIP).
  • In a SIP, the funds invested in the first year become redeemable after four years, those invested in the second year become redeemable after five years and so on. The entire investment sum becomes redeemable three years after the last investment.

You should note:

  • The investments are subject to market risks, as funds are invested in the equity market.
  • The returns are not guaranteed by the government.

Other Tax-Saving Schemes

All the tax-saving schemes listed below offer a tax exemption on the returns of up to ₹1.5 lakh every year:

Provident fund (PF)

The Provident Fund is a government mandated tax saving investment scheme. Any salaried individual who earns up to ₹15,000 a month in basic pay plus dearness allowance has to compulsorily deposit money in an Employees’ Provident Fund (EPF) account. Voluntary contributions can also be made beyond the mandated amount. Other than contributions by salaried workers, self-employed workers can also deposit money in another similar tax saving scheme called the Public Provident Fund (PPF).

Employees’ Provident Fund (EPF)

  • 12% of the total pay needs to be deposited compulsorily into the employee’s EPF account every month. The employer matches the deposits made by the employee (8.33% in Employee Pension Scheme and 3.67% in EPF account).
  • In contrast to ELSS, funds mature after five years and returns are tax-free only if redeemed after five years. Otherwise, redemptions are taxed.
  • The investments qualify for tax exemption under Section 80C of the Income Tax Act (up to 1.5 lakhs investment every year is tax-free).
  • Those who earn over ₹ 15,000 every month can also voluntarily open a PF account (Voluntary Provident Fund or VPF). Employees who have an EPF account can also invest sums over the mandatory 12% in a VPF account. Here, the employer doesn’t match contributions, investments qualify for tax exemption under Section 80C and returns are tax-free too after five years just like EPF investments.
  • At an annual return of 8.65%, PF investments are less rewarding than ELSS investments though returns are guaranteed by government and investments are made mostly in government bonds.

Public Provident Fund (PPF)

  • A PPF account is distinct from an EPF account, and can be opened by anyone.
  • Investments are capped at a maximum of ₹1.5 lakh every year and qualify for tax exemption under Section 80C of the Income Tax Act.
  • A maximum of twelve investments are allowed every year.
  • Maturity period is 15 years and can be extended for another 5 years.
  • The returns are tax-free only if withdrawn after maturity.
  • The present return on PPF investments is significantly lower than returns on other tax saving investments at 7.9% per annum, but is guaranteed by the government.

National Pension Scheme (NPS)

  • The scheme is mandatory for central government employees.
  • Tax exemption can be availed under Section 80C up to ₹ 1.5 lakh. An additional ₹ 50,000 tax exemption can be availed under Section 80CCD (1b)of the Income Tax Act.
  • The funds are invested in a variety of financial products, including equity. Annual returns are better than other tax saving investments — between 12–14%.
  • Only up to 25% of funds can be withdrawn after three years of deposit. More extensive withdrawals are possible only at 60 years of age.
  • 40% of the withdrawn amount needs to be compulsorily invested in annuity (financial instruments which offer periodic income like insurance, monthly pension schemes). Income on annuities is taxed as per the income tax slab.
  • Of the remaining 60%, 40% is tax-free. 20% of the final amount is taxed.
  • The entire amount can be withdrawn if your total pension is less than ₹ 2 lakhs.
  • Though returns are high and only second to returns from ELSS, heavy restrictions on withdrawal, taxation at withdrawal, compulsory reinvestment and taxation on income from annuities can make NPS less desirable as an investment option.

National Savings Certificates (NSC)

  • The returns are similar to those offered by PF investments and range from 8–9%.
  • The investments mature in five years, and the interest is tax-free for the first five years if reinvested. After five years, it is taxed.

Fixed Deposits

  • Tax saving fixed deposits have a lock-in period of five years, and are practically risk-free.
  • Returns are relatively lower — at rates between 7–8%, while they are slightly higher for senior citizens.
  • The interest (above the amount exempted by law) is added to the investor’s income and taxed based on the income tax slab.

Benefits of ELSS (Equity Linked Savings Schemes) over other tax saving schemes

  • Equity Linked Savings Schemes offer a much higher return at around 15% per annum, which compounds over time, though some market-risk is present.
  • The schemes have the lowest lock-in period of just three years, while the returns are tax-free.
  • ELSS, like other Mutual Funds, might be offered as dividend plans (pays out interest automatically at periodic intervals which can be then reinvested), growth plans (interest is reinvested automatically and total interest is paid out at the end) and as plans which offer investors the choice to either reinvest or withdraw interest at periodic intervals.

To summarize:

Investment type ELSS PPF FD NSC NPS
Returns (approx) 12-17% 7-8% 6.5-7.5% 7-8% 7-8%
Lock-in period 3 years 15 years 5 years 5 years Till retirement
Tax on returns No No Yes Yes Partial

How to invest in ELSS (Equity Linked Savings Schemes)

  • To invest in ELSS,you need to comply with Know Your Customer (KYC) norms.
  • If you’ve already invested in Mutual Funds or equities, your KYC details are already stored by registration agencies and you don’t need to register again.
  • If you are a new investor, you can become KYC compliant by registering online on KYC Registration Agency (KRA) sites like CAMS and Karvy. You can also register online on the websites of Mutual Fund management agencies if you’re buying Mutual Funds from them.
  • You need to provide your Aadhaar number, phone number linked to your Aadhaar account, an identity proof, an address proof, PAN number, email address and bank account details. You will also have to upload scanned copies of your photograph, identity proof, address proof, aadhaar card etc.
  • You can invest as soon as you complete the eKYC process. A maximum of ₹ 50,000 per Mutual Fund can be invested after eKYC is completed without In-Person Verification (IPV).
  • Nowadays, In-Person Verification (IPV) doesn’t need you to be physically present at a stipulated place, as the same can be done through a live video call. You might be asked questions pertaining to KYC details to confirm your identity.
  • You can also do KYC registration offline through a SEBI registered investment advisor, at banks, Mutual Fund agency offices etc but this takes a few days before your details are validated.
  • After KYC registration, you can invest in Equity Linked Savings Schemes (ELSS) online from MobiKwik Money.
  • MobiKwik Money allows you to invest both in multiple installments (SIP) every month, or as a one-time investment.
  • Reduce the risk profile of your investments by investing not only in equity-linked funds, but also in debt funds, hybrid funds (that invest in both equity and debt) and other investment safe havens like Fixed Deposits, Provident Fund, and government bonds.
  • Diversify your investments. Don’t invest all your money in a single Mutual Fund or in a single sector. Spread your investments across multiple funds and sectors to reduce risk.

When to invest in ELSS Funds
The best way to start planning your tax-saving investments is the start of the financial year. Most taxpayers procrastinate it till the last few months of the year and end up taking hurried decisions. Besides, if you start planning early, you can save your taxes as well as fulfill your long-term goals.
Some benefits of planning your taxes all year round include:

  1. Deciding on the right tax-saving product becomes easier: Tax planning should be complemented with investment planning. The target shouldn’t be just reducing taxes, but also helping your long-term goals. Starting early gives you time to make informed decisions instead of rushing and picking the first thing that you come across.
  2.  Regular Investing habit gets formed: Regular outflow of an amount every month lets you get into a regular investing mindset. Once you get okay with an outflow of money getting set aside, you can look at other mutual funds in accordance to your investment goals as well.
  3. Lesser outflow of income every month: Investing a lumpsum of money right at the end of a year may be too much of a financial burden on you. It is always more convenient to divide the amount into smaller chunks and invest every month.

When planning taxes, investing on a regular basis avoids the outflow of a large amount of money at the end of the financial year. When investing in mutual funds, it is advisable to invest in a phased manner rather than in a lump sum. These are somewhat volatile investments that are best cost-averaged with a SIP.

Planning early will help you look at all deductions available to boost your tax savings.

When is the tax time? The last quarter of the year.

4. Get prepared for the outflow 

If you’re a paid employee, many organisations deduct tax in the last quarter of the year. After all the accounting is done, if there’s tax payable, then the organisations deducts it from your income. Naturally it is important for you to plan for the amount that you are going to lose, as well as to make sure to minimize it with deductions.

Preparing early for tax payments is clearly far more beneficial for a taxpayer. Last minute preparations can turn out to be catastrophic, as a lack of tax planning may not only lead to mediocre investments but also inefficient returns.




Some ELSS funds recommended by MobiKwik are:

  • Axis Long Term Equity Direct Growth
  • DSP Tax Saver Direct Growth
  • ICICI Pru Long Term Equity (Tax Saver) Direct Growth
  • L&T Tax Advantage Direct Growth

As with any other investment, reach a decision on investing after your own analysis. To know more about the best ELSS Tax Savings funds and to invest in Equity Linked Savings Schemes (ELSS), register on the MobiKwik Money website or the app .