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Save Tax - Time to Opt for ELSS!
December 16, 2010

We highlight the advantages of ELSS over other investment alternative for tax saving as well as our recommend ELSS.

Author : Nikhil Kothari

Untitled Document

Soon the season for investment in tax saving instrument will start and employees would submit the requisite investment proofs in their companies, so that they can get the tax rebates as per their income slabs. Here, we explain one of the investment avenues to save tax which is cheap and lets you participate in India’s economic growth story.

Equity Linked Saving Scheme (ELSS) is an equity mutual fund that qualifies for tax deduction and has a lock-in period of 3 years. According to Section 80 C of Income Tax Act 1961, investor can deduct the amount invested in ELSS from their gross total income for the financial year, subject to a maximum limit of INR 1 Lakh.

Simply put, if you fall in highest tax bracket, you can save up to Rs 30,900 by investing in ELSS! For more details, read on...

Features & Advantages

ELSS invest around 80% to 100% in equity linked instruments and has a lock-in for three years which means, one can withdraw money only after 3 years from the date of investment. The minimum investment in ELSS can be as low as INR 500.

Key advantages of ELSS:

  • Save tax on initial investment.
  • Receive tax-free dividend
  • Get tax-free capital gains
  • 3 year lock-in period; less compared to other products under section 80 C

The blessing in disguise for ELSS is that the investor’s money stays for long term due to the lock-in period. Therefore, the fund manager can take bets on stocks in which he has conviction over long term. As long-term holding period is one of the basic principles for investment in equities, the lock-in period aids in the fund management process and the fund manager can deliver better returns owing to defined time period of the cash flows in the fund.

Chart :1 Comparison of ELSS with other Tax saving instruments

Instruments Minimum Investment (in INR) Maximum Investment (in INR) Tenure Return Taxability
Public Provident Fund (PPF) 500 70,000 15 Years 8% Tax Free
National Saving Certificate (NSC) 100 1,00,000 6 Years 8% Interest Income Taxable
5 Year Fixed Deposit 100 1,00,000 5 years 7.5% Interest Income Taxable
Endoment/ Pension Insurance Products Depends upon the product 1,00,000 Depends upon the product Depends upon the product Tax Free/Annuity taxable
Equity Linked Saving Scheme 500 1,00,000 3 years Market Linked Tax Free
Unit Linked Insurance Plan Depends upon the product 1,00,000 3 years (Minimum), Depends upon the product Market Linked Tax Free
New Pension Scheme 6000 1,00,000 Allows 20% lumpsum withdrawal before the age of 60 and rest is used to buy Annuity** Market Linked Taxable
Mutual Fund Pension Scheme 500 1,00,000 3 years Market Linked Taxable

* Interest income/Annuity is taxable as per marginal tax bracket. Maximum Investment deduction under section 80C, **NPS - Tier 1 Account

Source: Post office, PFRDA, ICICI Bank, iFAST Compilation

Though returns from ELSS are not fixed, they tend to surpass returns from all other categories over long term because of the equity element. Secondly, investor can withdraw after 3 years in ELSS whereas, Public Provident Fund (PPF) and National Saving Scheme (NSE) have lock-in for 15 and 6 years respectively.

The capital appreciation and dividend from ELSS are also tax-free as compared to NSC and Fixed Deposits, where interest is added to your gross total income and is taxed as per marginal tax bracket (highest being 30%). In New Pension Scheme, the maximum exposure to equity is only 50% for an individual who is below 35 years old whereas ELSS allows individual to invest 100% into equities.

As per the current draft of Direct Tax Code, the investment in ELSS before 1 April 2012 will continue to enjoy tax deduction. Post implementation of the Direct Tax Code, ELSS will not fall under section 80 C but, any capital appreciation on these funds would not be taxed.

Selecting ELSS

There are in total 48 ELSS from 41 Mutual Fund houses. Though there are numerous options, we highlight our Top 5 Recommended ELSS based on our in-house mutual fund research methodology.

  • Fidelity Tax Advantage Fund
  • HDFC Tax Saver Fund
  • Religare Tax Plan
  • Reliance Tax Saver
  • Sundaram Tax Saver Fund


Overall, we believe ELSS is a good investment vehicle to save tax as well as compound investment over long term. Investors can gain from the expected appreciation in equity markets over long term. We suggest investors who have not yet done their tax planning for the current financial year, to invest in staggered manner over next four months as this will help them to save tax as well as create wealth over long term.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.

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