ELSS: Everything you need to know

What is ELSS?

ELSS stands for Equity Linked Savings Scheme. ELSS mutual funds are those which derive returns from the equity market. These funds are tax saving in nature and you can get tax deductions up to Rs. 1.50 lakh under Section 80C of the Income Tax Act.

These schemes are a special type of mutual funds which are majorly encouraged by the Government for long-term investments. ELSS schemes in India generally invest a majority of the investment corpus into equity-linked financial products or equities.

There are two kinds of ELSS mutual funds, namely growth and dividend. The latter is sub-divided into Dividend Reinvestment and Dividend Payout plans. For the latter option, the ELSS dividend payout is received by the investor as a tax-free return. However in case, the former option is selected, the dividend will be reinvested in the nature of a fresh deployment for buying shares in greater numbers.

For the growth option, investors may look at creating wealth for the long haul. The full investment value will be realized cumulatively once the fund is redeemed in this case. ELSS investments are usually made in the form of systematic investment plans (SIPs) or lump sum payments.

What are features and benefits of ELSS?

ELSS tax benefits are available for investors. The best ELSS schemes not only provide tax benefits but also ensure accomplishment of long-term financial goals. Equities come with possibilities of higher returns over the long haul which can be higher as compared to other financial instruments that help in saving taxes. ELSS tax saving funds usually have lock-in periods of 3 years.

One of the biggest ELSS benefits is that these mutual funds are equity funds and hence returns that you derive after the conclusion of a year will be totally tax free. This is one of the key ELSS features that you should be aware of. The ELSS lock-in period is three years and as a result, the capital gains from these funds and also the dividends will be free from taxes.

Is ELSS taxable? It offers investment in mutual funds tax benefits and you can claim exemptions on taxes under Section 80C. Suppose you have an ELSS limit of Rs. 1, 50, 000. You can thus get savings on taxes up to Rs. 46, 530 in case you are in the 30% top income tax benefit. This includes the 3% of cess that is applicable.

What are the benefits of ELSS? This may vary based on the tax slabs which are applicable to individuals based on their respective incomes and returns. Along with the ELSS mutual funds tax benefits you can expect higher returns exceeding 15% or more at times while saving money simultaneously. The returns are linked to the market. You can also accomplish long-term goals by making ELSS investments including buying a home, paying for the education of your child, planning a wedding and so on.

Choosing the dividend option will ensure that you get returns consistently and you can regularly receive income which is tax-free. You can invest through regular SIPs (Systematic Investment Plans) or via lump sum amounts. The lock-in period of three years is also lower as compared to lock-in periods for other investments like NSC, PPF, TD, and FDs which have minimum lock-in periods of 5 years and even more.

Who are eligible to open ELSS funds?

Equity-linked savings schemes are good investment options for those who want wealth creation for the long-term along with tax savings. However, the ELSS eligibility criteria have to be considered before opening these funds. There are certain criteria which have to be met in order to be eligible for opening ELSS plans.

These may vary from one financial institution to another but the core tenets remain the same. Some of these include the following:

  • The applicant for the ELSS investment plan should have an account held with the bank where he/she is applying for investing in these plans.
  • There should be full KYC compliance for the applicant in terms of documents and identity and address proofs.
  • The application form for opening the account has to be signed by all the holders of the bank account
  • The status of the Savings Bank Account should be Single/Survivor

The ELSS lock-in period is usually 3 years. Existing customers of a bank can easily get their forms downloaded and once these are filled up, they can submit it with the KYC application and Customer Risk profiler at their nearest branches.

Know Your Customer or KYC is the procedure for identifying customers. All those investing in mutual funds have to be totally KYC compliant with the registration agency which is NSE, KARVY, CAMS, CVL or NSDL compulsorily. These KYC regulations are to be held as mandatory for all investors/applicants while investing money into any mutual fund registered with SEBI.

What are the best top 10 ELSS funds & break up the portfolio of market capitalization?

If you are looking for the very best ELSS funds in the country to invest, there are plenty of choices at your disposal. Here are the top 10 ELSS funds that you can certainly consider:

  • Axis Bank Long-Term Equity Fund– 22% and 20% (CAGR) over last 3 and 5 years
  • Franklin India Taxshield– 20% and 17% CAGR over last 3 and 5 years
  • Reliance Tax Saver ELSS– CAGR of 22% and 19% over last 3 and 5 years
  • DSP BlackRock Tax Saver Fund- 22% and 19% CAGR over last 3 and 5 years
  • ICICI Prudential Long-Term Equity Fund– 18% and 17% CAGR over last 3 and 5 years
  • Birla Sunlife Tax Relief 96 growth– 21% and 18% CAGR over last 3 and 5 years
  • Invesco India Tax Plan– CAGR of 20% and 17% over last 3 and 5 years
  • Principal Tax Savings- 19% and 18% CAGR over last 3 and 5 years
  • IDFC Tax Advantage- CAGR of 17% for both 3 and 5 year periods
  • Tata India Tax Savings- 21% and 16% CAGR for last 3 and 5 year periods

*CAGR = Compounded Annual Growth Rate

Market Cap/Portfolio Break-Up Table- Top 10 ELSS Funds

Fund Name Portfolio Break-up (market capitalisation)
Giant Cap Large Cap Mid Cap Small Cap
Axis Long Term Equity Fund 48.78 21.16 29.02 1.03
Franklin India Taxshield Fund 62.46 18.59 17.62 1.33
DSP BlackRock Tax Saver Fund 49.89 18.82 25.23 6.07
Reliance Tax Saver Fund 26.90 18.82 39.28 15.00
ICICI Prudential Long Term Equity Fund 32.47 17.64 43.35 6.54
Birla Sunlife Tax Relief 96 31.43 15.82 49.72 3.03
Invesco India Tax Plan 56.98 12.19 26.00 4.83
Principal Tax Savings Fund 44.25 13.27 32.72 9.76
Tata India Tax Saving 27.66 16.62 35.50 20.21
IDFC Tax Advantage 31.38 12.22 35.14 21.26
Category Average 43.98 17.40 31.39 9.04

How to open Equity Linked Savings Scheme?

Wondering how to open ELSS accounts? There are a few steps that you will have to go through in this regard:

  • Select your preferred tax plan based on returns and overall performance.
  • Choose the type of open ended ELSS mutual funds that you would like to invest in or choose from tax saving and regular plans.
  • Wondering where to open ELSS account? You can open one at your bank and this is the account which will get your dividends credited.
  • Choose an intermediary from multiple mutual fund houses and agencies across the country. You may/may not opt for the commission based plan.
  • You can take the process further offline by selecting a mutual fund distributor. There are several distributors who will be investing in funds on your behalf and you will get the returns accordingly. However it is important to be very careful while choosing the right mutual fund distributor for yourself.
  • This is the most important step in case you are looking to set up ELSS online. You can easily open ELSS account online by choosing an online mutual fund distributor or fund house. Several mutual fund investment agencies give you the option for applying and opening an account online itself. You can seek out online investment options for ELSS funds.

Where to open ELSS account?

If you are wondering where to open your ELSS account, there are several private and public sector banks that you can consider. You should always inform your bank about your desire to open an ELSS account. You can choose an ICICI ELSS account for your investments or go for Axis ELSS accounts if the plans seem more favorable to you. You can also try HDFC ELSS plans or SBI ELSS schemes.

You can always open ELSS accounts online or offline at your nearest banking branch. You can also choose your investment plan which is to be made on a bi-annual or annual basis. You can also choose quarterly investments if you are comfortable with investing lump sum amounts. There are several other financial institutions that you can opt for like IDFC ELSS and Reliance ELSS. You can also choose Systematic Investment Plans or SIPs which offer higher benefits since you can plan out your investments every month in a highly disciplined manner.

Banks have multiple ELSS options available and HDFC Bank and Axis Bank are the popular picks while SBI and Union Bank of India also offer multiple ELSS schemes. You can always do your homework with regard to investing in ELSS funds for tax benefits and long-term creation of wealth. Usually, lock-in periods for ELSS investments are around 3 years.

The shorter lock-in period for ELSS investments makes them attractive options for investors, particularly younger professionals who wish to maximize wealth creation. These plans are linked to equities and have ample potential for higher returns. There are divided options that you can choose for getting good returns in the lock-in phase. You should always look up the specific ELSS investment plans offered by banks as mentioned above. You can also open an ELSS investment account online/offline with a mutual fund distributor or firm.

What are the documents required for ELSS mutual funds?

In case of private limited organizations, there is a strong need to effectively manage working capital needs. There can be investments made in short-term and liquid income based mutual funds. Investments may be channeled via equity/balanced funds for fulfilling growth objectives over the longer haul. However, those who wish to know how ELSS works, should know that certain documentation needs have to be met.

Corporate companies often prefer ELSS tax saving funds for maximizing returns. The documents required for ELSS include the following:

  • KYC non-individual form
  • Balance sheet for last 2 financial years
  • Latest share holding pattern
  • Identity & address proof, DIN for directors, PAN, photograph, POI, PAN of individual promoters, articles of association, Memorandum, certificate of incorporation
  • Filled up mutual fund application form
  • Signatory list and specimen signatures
  • Board resolution copy
  • Cheque in name of scheme

The best ELSS schemes can help corporate and private limited organizations suitably manage their needs in terms of working capital. They can invest in short-term and liquid income generating mutual funds.

They can also invest in equity/balanced funds for garnering growth objectives for the longer term. A resolution should be passed by the Board of the company and its directors which enables investments in mutual fund schemes in addition to any limits if they are present. There should be power given to persons authorized for investments and also for executing the documentation procedure.

The mutual fund and KYC application forms and supporting documentation have to be submitted to the AMC branch and mutual fund’s acceptance. In case things are fine, then the KYC documents have to be sent to the KYC Registration Agency. The KYC Applied status will be applied for issuing mutual fund units.

How to maximize returns with ELSS funds

ELSS funds are often preferred investments for many people who wish to maximize their returns. Many investors are choosing these ELSS tax saving funds which also help them achieve specific financial objectives. When it comes to ELSS investments, a tip for younger investors who are aged between 24-30 is that they should be more aware about mutual funds and flexibility of financial products like these. Several young investors put in all their investment corpus in the hope of greater tax savings and added returns.

Investors should be aware about the ELSS investment procedure and its intricacies. There should be no isolated tax planning approach. ELSS investment plans should be aligned with long-term goals. All eggs should not be put into one basket. Wondering how to invest in ELSS online? Invest with SIPs instead of lump sum amounts. Do not invest if the investment horizon is not 5-7 years for you. A 3-year horizon for only 80C ELSS tax saving will not be suitable. These funds are risker for investments in the short term. Rather, a long-term investment horizon is the best way to achieve financial goals and save taxes along the way as well.

How to claim tax deductions on ELSS investments

There are several ELSS 80C tax saving avenues and you can also enjoy good ELSS funds returns if you are investing for the long haul. There are several ELSS tax saving schemes that you can opt for in this regard.

  • Most ELSS plans come with tax exemptions up to Rs. 1.5 lakh under Section 80C. However, remember that investment options for deductions in this section include PPF, NPS and FDs.
  • You can claim the ELSS benefits while filing your ITR for a particular financial year by showing investment documents as proof.
  • You can have multiple ELSS plans but the maximum deduction will be Rs. 1.5 lakh under Section 80C. Any amount exceeding this will not get you tax benefits.
  • Whenever you invest through multiple SIPs, the same threshold applies. You should remember the maximum threshold while investing. The 3-year lock-in period will be separately applicable for each SIP investment.
  • You need not invest in new ELSS plans each year to get tax benefits. You can change your fund in case you are not satisfied with the returns.
  • You need not exit ELSS plans once the lock-in period ends since these plans may deliver better returns over a longer period of time.

What are the advantages and disadvantages of ELSS?

There are several advantages and disadvantages of ELSS that you can consider. A direct plan ELSS comes with several advantages:

  • 3-year lock-in periods- Investment avenues like PPF and NSC come with lock-in periods of 15 years and 6 years respectively. However, the shorter lock-in period is one of the major ELSS advantages.
  • ELSS tax exemptions- You can get exemptions up to Rs. 1.50 lakh under Section 80C.
  • Dividend & Growth Options- You can choose dividend options for earning regularly throughout the lock-in period or invest in the growth scheme where you get a lump sum amount upon expiration of the lock-in period.
  • High Return Potential- Investing in ELSS online or offline can get you potentially high returns.
  • No investment limit- There is no ELSS investment limit although maximum tax savings can be Rs. 1.50 lakh under Section 80C.
  • No Minimum Investment Amount Limit- ELSS investments can be made with amounts which are lower such as Rs. 500. This makes it a good option for younger professionals.

Here are the disadvantages of ELSS:

  • High risk quotient- The risk aspect is higher in comparison to PPF and NSC investments.
  • Withdrawal limitations- The money invested cannot be withdrawn by investors prior to the expiration of the 3 year lock-in period.

What is ELSS calculator, how to calculate?

An ELSS calculator helps you work out your returns. There are several ELSS return calculators offered by banks and other financial institutions for investors.

Lump Sum Calculator-

You have to provide information on the duration of investment, expected annual returns and the investment amount. The calculator will give you the expected investment value of your ELSS scheme. For example, at a return rate of 15% for your ELSS tax saving plan for an investment corpus of Rs. 10, 000 for a period of 40 months, you will get an annual return of around Rs. 16, 337.

SIP Calculator-

Learn how ELSS works by using an SIP calculator. The calculator requires your investment amount, expected return rate and SIP tenor. For example, investing Rs. 2, 000 each month for 12 months at a rate of 15%, you will get Rs. 26, 016 in all.