Context:
The once-popular Equity-Linked Savings Scheme (ELSS) is witnessing a decline in investor interest as taxpayers increasingly shift to the new tax regime, which does not offer tax deductions under Section 80C.
What are ELSS Funds?
Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that primarily invest in equities and offer tax deductions under Section 80C of the Income Tax Act, 1961.
Key Features of ELSS Mutual Funds
- Equity-Oriented Investment:
- Invests majorly in equity and equity-related instruments (across large-cap, mid-cap, and small-cap stocks).
- Tax Deduction Under Section 80C:
- Investments up to ₹1.5 lakh annually qualify for income tax deduction, offering potential tax savings up to ₹46,800 (for highest tax slab).
- Mandatory Lock-in Period:
- ELSS has the shortest lock-in among all 80C instruments — 3 years. The funds cannot be withdrawn before this tenure.
- Capital Gains Taxation:
- Gains after 3 years are treated as Long-Term Capital Gains (LTCG).
- LTCG up to ₹1 lakh/year is tax-exempt.
- LTCG above ₹1 lakh is taxed at 10% without indexation.
How ELSS Funds Work
- Managed by professional fund managers.
- Portfolio includes diversified stocks selected after detailed research.
- Goal is long-term capital appreciation while providing tax savings.
- Can be invested via lump sum or Systematic Investment Plans (SIPs).
Modes of Investment in ELSS Funds
- Lump Sum Investment: One-time investment with a 3-year lock-in per transaction.
- SIP (Systematic Investment Plan): Regular monthly investments — each SIP has its own 3-year lock-in.
- Online Mutual Fund Platforms or via Asset Management Companies (AMCs) directly.
