Easy Guide to Understand ELSS: Tax and Other Benefits

An Equity-linked Savings Scheme is a mutual fund scheme that allows you to enjoy dual benefits – accumulating wealth and enjoying substantial tax deductions. ELSS funds mostly invest in equity (shares and securities) for a 3-year lock-in period.

Since the performance of this scheme depends on market movements, it carries a higher risk compared to traditional investment options like fixed deposits. However, they also promise potentially more attractive returns if you stay invested for a longer term. 

To understand why the equity-linked saving scheme is a great investment instrument for reducing your tax liabilities, read on.

What are ELSS Mutual Funds?

ELSS full form in mutual fund is equity-linked savings scheme. These are considered an excellent investment in India, usually combining the benefits of equity-oriented investments with fixed income securities. Your investment in it comes under Section 80C of the Income Tax Act of 1961, so you can enjoy tax deductions.

To understand what is ELSS mutual fund and its popularity, take a look at the following features:

• Tax Benefits: You can save up to ₹1.5 lakh in taxes through ELSS under Section 80C
• Equity Exposure: Majority of your investment is allocated to equities, providing high growth potential
• Diversification: ELSS funds diversify risk by including a mix of debt instruments in addition to equity
• Lock-in Period: ELSS has a mandatory lock-in period of 3 years, which means you cannot withdraw your investment before this time is up
• Flexibility: You can invest any amount as per your financial goals, with the flexibility to increase or decrease contributions

Things to Consider Before Investing in ELSS

Know the factors essential to building your long-term wealth with ELSS investments.

• Fund Returns: When investing in a scheme, compare its performance with other schemes of the same type
• Fund House History: Check the history of the fund house you are choosing to ensure it is stable and has generated high returns in the past 
• Expense Ratio: Choose funds that have a lower expense ratio to enhance your potential earnings
• Lumpsum or SIP: Select from recurring investments or invest a lump sum based on your finances by keeping in mind that each contribution in a SIP will be locked in for 3 years until you can withdraw

Also Read: Tax Saving Options in India

Comparison Between ELSS and Other Tax-Saving Schemes

 Alongside ELSS, there are a few more tax-saving schemes that you can use to build your long-term wealth. Take it a look at how it compares against them:

Investments	Investment Type	Lock-in Period	Risk Level	Expected Returns	Tax Deduction Limit (Section 80C)
Equity Linked Savings Scheme (ELSS)	Mutual Fund (Equity-oriented)	3 years	High	Market-linked	Up to ₹1.5 lakh
Bank Fixed Deposit for 5 years	High-interest-yielding term deposits	5 Years	Low	6.20% to 7.75%	Up to ₹1.5 lakh
Public Provident Fund (PPF)	Government Scheme	15 years	Low	Keeps changing; 7.1% currently	Up to ₹1.5 lakh
National Savings Certificate (NSC)	Government Scheme	5 years	Low	Keeps changing; 7.7% currently	Up to ₹1.5 lakh

Disclaimer: The rates mentioned are subject to change; please check the current rates before investing.

How to Withdraw From ELSS

 On maturity, you can redeem your equity-linked savings scheme mutual fund units. The entire process can be completed in a few steps:

• Submit a redemption request to the fund house
• The fund house will process the request
• It will credit the amount to your bank account

This is quite a simple process. However, you can only do it when the lock-in period ends. In fact, you can stay invested in ELSS for longer as you can increase your potential earnings. So, if you need funds to upgrade your life, do not break your investment. Instead, you can get access to quick funds with a personal loan.

With the Fibe Online Personal Loan, you can get up to ₹5 lakhs with minimum paperwork and reasonable interest rates. Alongside easy-to-meet eligibility criteria, this loan has a flexible repayment tenure of up to 36 months. You can also foreclose your debt with zero foreclosure charges. Apply for it now by downloading our Personal Loan App or registering on our website.

FAQs on ELSS Withdrawal Rules and Tax Benefits

Is ELSS a good investment?

The equity-linked saving scheme is a popular investment as it offers you tax savings along with a high potential for building wealth. However, choose it based on your appetite for risk. It is best to invest in it if you are thinking of the long-term benefit. 

Is ELSS better than PPF?

Understanding what is equity linked savings scheme can help you answer this question. It has market-based returns, while PPF is a government scheme with stable and moderate returns. However, the lock-in period of ELSS is lower than PPF, which is 15 years. Make a decision based on your unique needs and risk appetite. 

Can I invest ₹1 lakh in ELSS?

Yes, ELSS has no upper cap. You can invest as much as you prefer. However, in some funding houses, there is a minimum amount that you need to invest. Check this before you proceed. 

What is the lock-in period of ELSS?

The lock-in period is 3 years. You cannot redeem your investment before this period ends. 

Is ELSS taxable after 3 years?

You can save up to ₹1.5 lakhs on your invested amount since ELSS comes under Section 80C of the Income Tax Act of 1961. When it comes to tax on ELSS returns, you will need to pay long-term capital gains tax as well as the applicable cess and surcharge on earnings above ₹1 lakh a year. You will also pay tax as per your slab on any dividends you get.