What is ELSS and how can it help save tax?

Published On: Jul 19, 2021Last Updated: Oct 14, 20234 min read


ELSS is an abbreviation of Equity Linked Savings Scheme. It is a diversified equity mutual fund that invests most of its funds, almost 80% in equity and equity-related schemes. ELSS has a lock-in period of three years for each transaction you make. During which the investor cannot redeem or transfer the units to another scheme. Nonetheless, investors can claim the tax benefits from the financial year they invested in the ELSS under section 80C of the income tax act

The selection of stock depends on the market size (big, mid, or small caps) and industrial sector. These funds seek to optimize long-term financial appreciation. The fund manager opts for the stocks after conducting thorough market research to deliver optimal risk-adjusted portfolio returns.

How can one invest?

The person who wants to invest in the ELSS can invest in either of the two ways;

– Monthly SIP.

– Lumpsum.

Minimum investment.

Any individual who wants to invest in ELSS can invest as low as Rs. 5,000 through monthly SIP or lumpsum payment. Nonetheless, there is no upper limit on the investment.

Ways to invest.

Growth option.

When you take this option, you will not receive benefits in the form of dividends. As the investor, you will get the benefits only at the time of the redemption – this helps to appreciate the total net asset value, and hence, the profits multiply. There is one thing you should remember – the returns will be subjected to market risks.

Dividend option.

In this option, the investor gets the benefits from time to time in an entirely tax-free dividend. The declaration of compensation is possible only when there are excessive profits.

Dividend reinvestments option.

Under this option, the investor reinvests the dividends received to add to the net asset value. This works well, specifically when the market is going through an upswing and is likely to persist the same way.

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Aspects to consider while opting for the fund.

– Expected gain and return.

– History of net asset value and NAV trend.

– AUM (fund size).

– Exit load.

– Expense ratio.

– Fund manager.

– Financial parameters.

– Beta.

– Risk involved.

– Age of fund.

Deduction under section 80C.

ELSS is one of the investment options available under section 80C of the income tax Act, 1961, for which the taxpayer can avail benefits of up to Rs. 1.5 lacs in the financial year. The amount of tax benefit available at the time of online ITR filing remains the same as the investments made during the stipulated time. Although, it subject to the entire ceiling limit of Rs. 1.5 lacs considered for all eligible investments/payments taken together.


Under the lock-in period of 3 years, the investment will be considered long-term from the income tax perspective. The profits at the date of withdrawal should be long-term capital gain as per applicable tax rate of ten percent (along with cess and surcharge) applies only if the gain/return exceeds Rs. 1 lac.


Open-end ELSS.

Under this, investors can invest in the ELSS at any particular time as per their fancy. The three-year lock-in period is nonetheless applicable, but once it ends, redemption can be made at any time of the investor’s choice.

Closed-end ELSS.

It only takes investment during the new funds offer period, and after that, it will be closed for investments. Also, investors can liquidate their investment in the closed-end fund after a completion period of three-years lock-in at only a particular period as mandated by the fund from time to time.


The shortest lock-in period is approximately 3 years in comparison to other investments.

High returns – it can generate considerable high returns in the medium to the long term investment horizon.

Tax-free dividends and capital gains – the return on the amount of investment in the ELSS is non-taxable up to Rs. 1 lac.

Monthly SIP – an investor can invest either through monthly SIP or lumpsum amount, per their risk appetite and cash flow. It is possible to start with the minimum investment of Rs. 500.

Tax deduction under section 80C – an investment made in ELSS can be claimed as deduction under section 80C of income tax act subject to maximum overall limit of Rs. 1.5 lacs in a year of investment.


Under section 80C, the investment in ELSS units will not be redeemed at the end of the lock-in period. One can continue beyond the lock-in period if one wants to. It enables investors to link with their long-term financial goals as ELSS allows investors to club their financial plans and tax savings.

Looking to save income tax?
Read to know more about income tax savings in India.

Top performing ELSS funds.

– Mirae asset tax saver fund.

– Quant tax plan.

– Canara Robeco equity tax saver fund.

– IDFC tax advantage ELSS fund.

– DSP Tax saver fund.

In conclusion

It is the best available option in the market for investors for short and long-term benefits.

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Hiral Vakil
About the Author

Hiral Vakil

She is a Chartered Accountant by profession with 5+ years of experience in the fintech startup ecosystem. She enjoys writing content and sharing her knowledge on topics related to accounting, taxation, and corporate finance.