Equity Linked Saving Schemes: Tax Benefits With Mutual Funds

This is again that time of the year when most individuals (generally those who falls under tax bracket) start considering various tax-saving options available under Section 80C for the purpose of tax savings. Those who are doing job or service need to submit proof of their employer but those who have not invested till now will have to evaluate the options available and invest wisely.

Many a time, tax saving becomes an end in itself and individuals end up investing in anything that comes to their mind. This is the time when insurance based products and popular tax-saving options like tax-saving fixed deposits, Employees Provident Fund (EPF), National Savings Certificate (NSC), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), and others are pitched as tax saving options.

Equity Linked Saving Schemes

The point is, if people do make sense, they should not be considered just because they want to save tax. Tax savings should just be incidental to the overall investment objective rather than it becoming a goal in itself.

If tax savings at the time of investment is combined with a good investment whose return are also tax-free, then an investor will truly be leveraging the full benefits of making such investments. Equity Linked Saving Schemes is one such option, where you can save tax in the year of investment, the investment itself is a good one and the returns are not taxable after the investment period ends. Let’s take a deep look into it.

What is ELSS Fund?

ELSS stands fro Equity Linked Saving Schemes, it is a tax saving mutual fund that is open to investing all through the year.

ELSS Advantages

Offer Shortest Maturity Period:

Maturity period (lock-in period) is the time for which you are not allowed to withdraw your investment. As compared to other alternatives available under Section 80C, ELSS has the shortest maturity period (3 years) and that’s why it has gained popularity. Even though it has the shortest lock-in period, it is always advisable to stick around for longer duration to create wealth.

Other alternatives and Maturity Period

Tax-Saving Fix Deposit = 5 Years

National Savings Certificate (NSC) = 5 Years

Public Provident Fund (PPF) = 15 Years

Post Office Time Deposit = 5 Years

Senior Citizen Saving Schemes = 5 Years

Invest in Stocks:

As compared to other alternatives, ELSS is the only product which invests around 80% to 100% of your funds into equities. Thus, in addition to the tax advantage, you can create wealth towards achievement of long-term financial goals like retirement, your kids higher education or even their marriage.

Comparison of PPF v/s ELSS over 15 years time

Equity Linked Saving Schemes

Offer High Return on Investment:

Going by the thumb rule, long term investment generates higher returns to beat the inflation rate. But if we do a ground research, it’s a different story altogether. Fixed-interest generating securities like PPF or NSC offer returns in the range of 7% to 8%.

Since ELSS typically invests in the equities, you can expect them to earn higher returns especially from the point of view of a long-term investor (see above chart)

ELSS Tax Advantages

Investment Deduction:

Equity Linked Saving Schemes are one of the eligible options that qualify for a deduction under section 80C of the income tax. This means that the investments made into the ELSS funds will qualify for a deduction from the taxable income of the individual. This is part of the overall limit of INR 1.5 lakhs that are available for individuals and they can make the full use of this limit in the investment.


The Equity Linked Saving Scheme is an equity oriented option as the entire portfolio of the fund is invested in equity shares. So, in terms of the receipt of the earning on the fund the dividend that is actually received is TAX-FREE in the hands of the investor. There is also no dividend distribution tax that will be levied on the fund at the time of the payment of the dividend.

Capital Gains:

The other route in which the investor will actually gain from the investment is through capital gains on the amount invested. This happens when the investor get an appreciation in the value due to the rise in the NAV (net asset value) of the fund. Since there is a 3-year lock-in on the fund there cannot be a short-term capital gain earned on the investments.


Disclaimer: The contents and data presented here are just for your information & personal use only. While much effort is made to provide the information, I ( Vishal Dalwadi ) or “Fin Blab” do not guarantee the accuracy, correctness, completeness or reliability of any information or data displayed herein and shall not be held responsible.


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About me

Vishal Dalwadi

Vishal Dalwadi

Vishal is an MBA (Finance) post-graduate. He is the founder and owner of "FinBlab". His blog aims at providing information and research on Stock market and sectors including Mutual funds, IPOs, Insurance and more.

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