A Guide on ELSS Mutual Funds

A Guide on ELSS Mutual Funds

An Equity Linked Savings Scheme (ELSS) fund is a type of mutual fund scheme that invests primarily (a minimum of 80%) in equity and equity-related instruments in accordance with Equity Linked Saving Scheme, 2005 as notified by the Ministry of Finance.

Features of ELSS Mutual Funds

  • An ELSS fund invests at least 80% of the total corpus in equity and equity-related instruments
  • Investments can be made in stocks across market capitalisations and sectors as may be defined in the Scheme Information Document (SID) of such schemes
  • The risk associated with ELSS funds is very high as they invest primarily in the stock market.
  • ELSS funds are open-ended, so you can keep investing in them anytime
  • By investing in an ELSS fund, investors can claim deduction from their gross taxable income under Section 80C on Income Tax Act, 1961
  • The systematic investment plan (a.k.a. SIP) route is available to investors who do not wish to invest in ELSS funds through the lump sum route
  • ELSS funds has a  lock-in period of three years from the date of purchase, and is considered to be one of the lowest lock-in periods among various tax saving instruments
  • Capital gains of up to Rs 1.25 lakh from the fund is exempted from tax and taxed at 12.5% thereafter. 
  • There is no upper limit to the investment you can make in an ELSS fund. However, the deduction from gross taxable income will be limited to Rs 1.5 lakh as per Section 80C of The Income Tax Act, 1961 along with other tax-saving instruments such as PPF(Public Provident Fund), NPS(National Pension Scheme), NSC(National Savings Certificate).

How Does ELSS Funds Work?

Equity-Linked Savings Schemes (ELSS) are mutual funds that primarily invest in equities and equity related  instruments. 
A minimum of 80% of the portfolio is invested in equity and equity related instruments.The remaining portion could be invested as defined in the asset allocation table given in the Scheme information document of the concerned scheme. 
Investments in ELSS funds have a lock in period of three years, and therefore, you cannot redeem or withdraw your money before that period is over.

Taxation Rules of ELSS Funds

Since ELSS funds are locked up for three years, hence there is no short-term capital gains tax applicable. As a result, you can only be taxed on long-term capital gains (if any). Capital gains of up to Rs 1.25 lakh from the fund is exempted from tax and taxed at 12.5% thereafter. 
As mentioned above, Section 80C of the Income Tax Act, 1961  offers tax deduction benefits on the principal invested by you in an ELSS scheme. This is a cumulative deduction benefit, meaning you can avail a tax deduction of up to Rs. 1.5 lakh under the above-mentioned section for investments made in all instruments like ELSS(Equity Linked Saving Schemes), NSC(National Savings Certificates),  PPF(Public Provident Fund) etc.
The probability that investors will suffer losses as a result of the market' performance. There are numerous reasons that might have an adverse effect on stock market prices - including recession, political considerations, market sentiment, and so on. Equity Linked Savings Schemes must invest at least 80% of their assets in equity and equity related instruments. As a result, an ELSS fund's portfolio is subject to market risk.

Understanding Passive ELSS

These are ELSS mutual funds that aim to generate returns by tracking a specific market index. They are also referred to as Passive ELSS Funds.
Until May 2022, all Equity Linked Savings Scheme (ELSS) funds offered by Asset Management Companies (AMCs) were actively managed. However, on May 23, 2022, SEBI issued a circular permitting AMCs to introduce passive ELSS funds, effective from July 1, 2022.
As per SEBI guidelines, Passive ELSS funds would be based on selected indices, which are composed of stocks from the top 250 market capitalization companies. This means that passive ELSS can invest predominantly in large-cap and mid-cap companies, tracking indices such as Nifty 50, Nifty 100, Nifty 200, Nifty Large Midcap 250, etc.

Conclusion

 In conclusion, ELSS funds offer an opportunity to save on taxes while potentially growing wealth over time. However, it is important to carefully evaluate factors such as risk tolerance, investment objectives, expense ratio, and tax implications before investing. Understanding these aspects can help investors make well-informed decisions aligned with their financial goals.


Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The Nifty indices mentioned herein are owned by NSE Indices Limited. All information provided is for informational purposes only.

This information is for general knowledge only and should not be considered as tax advice. Please consult a tax advisor for guidance on your specific tax situation.

Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Published on Feb 24, 2025

Read more