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Equity-linked savings Schemes, commonly known as ELSS, are one of the most favored tax-saving investment options among Indian taxpayers. Their appeal lies in the unique combination of tax benefits, potential for wealth creation, and relatively short lock-in period.
However, despite their widespread popularity, many investors often misunderstand ELSS funds. In this blog, we will explore why ELSS funds are popular for tax saving and address some common misunderstandings surrounding them.
ELSS funds stand out among tax-saving instruments due to a combination of factors that appeal to a wide range of investors.
The primary reason ELSS MF enjoys such popularity is its potential for higher returns. By requiring that at least 80% of the fund corpus be invested in equity and equity-linked instruments, ELSS funds provide investors with an opportunity to participate in the equity markets.
In the last 3-5 year period, ELSS funds have offered strong returns, averaging about 13 to 14% annually. For example, the ICICI Prudential ELSS tax saver fund under the ICICI Prudential mutual funds has delivered 18.71% as annualised returns for the past 3 years. This makes ELSS not just a tax-saving tool but also a vehicle for long-term wealth creation.
Another factor contributing to the popularity of ELSS is its tax-saving advantage. Under Section 80C of the Income Tax Act, investors can claim up to ₹1.50 lakh as an exemption in a financial year, which translates into significant tax savings, especially for those in higher tax brackets.
Compared to other Section 80C instruments like the Public Provident Fund (PPF) or tax-saving fixed deposits, the ELSS funds' lock-in period is only three years. Because of the short lock-in and potential for equity-linked growth, ELSS funds are an attractive option for investors.
ELSS funds offer flexibility in investment amounts, allowing investors to start with as little as ₹500 and invest through Systematic Investment Plans (SIPs), which helps inculcate disciplined, regular investments and rupee-cost averaging. After the lock-in, there is no exit load, and withdrawals are relatively straightforward.
Despite these advantages, several misconceptions persist about ELSS. Some of those are mentioned below:
Another area of confusion is the lock-in period. While ELSS has a lock-in of three years, this applies to each investment or SIP installment, not the entire corpus as a whole. This means that if you invest monthly through SIPs, each installment will be locked in for three years from its respective date of investment.
Many investors mistakenly believe that they can redeem the entire ELSS investment after three years from the initial investment date, which is not the case.
One common misconception is underestimating the risk associated with ELSS investments. Unlike traditional tax-saving instruments such as PPF, ELSS fund returns are market-linked and not guaranteed.
The inherent volatility of equity markets means that ELSS fund investments can experience fluctuations and even losses in the short term.
Taxation on gains is another aspect that is often misunderstood. Gains from ELSS held beyond the lock-in period qualify as long-term capital gains (LTCG). However, LTCG above ₹1.25 lakh in a financial year is taxable at 12.5%.
Some investors assume that all ELSS returns are tax-free, which is incorrect. Understanding the taxation method is important for realistic post-tax return expectations.
ELSS funds are popular because they combine tax savings with the potential for attractive long-term returns and investment flexibility. However, misunderstanding the risks, lock-in rules, and taxation can lead to disappointment. For best results, treat ELSS Funds as a long-term wealth creation tool, not just a tax-saving quick fix, and invest with a clear understanding of their features and risks.
Equity-linked savings Schemes, commonly known as ELSS, are one of the most favored tax-saving investment options among Indian taxpayers. Their appeal lies in the unique combination of tax benefits, potential for wealth creation, and relatively short lock-in period.
However, despite their widespread popularity, many investors often misunderstand ELSS funds. In this blog, we will explore why ELSS funds are popular for tax saving and address some common misunderstandings surrounding them.
ELSS funds stand out among tax-saving instruments due to a combination of factors that appeal to a wide range of investors.
The primary reason ELSS MF enjoys such popularity is its potential for higher returns. By requiring that at least 80% of the fund corpus be invested in equity and equity-linked instruments, ELSS funds provide investors with an opportunity to participate in the equity markets.
In the last 3-5 year period, ELSS funds have offered strong returns, averaging about 13 to 14% annually. For example, the ICICI Prudential ELSS tax saver fund under the ICICI Prudential mutual funds has delivered 18.71% as annualised returns for the past 3 years. This makes ELSS not just a tax-saving tool but also a vehicle for long-term wealth creation.
Another factor contributing to the popularity of ELSS is its tax-saving advantage. Under Section 80C of the Income Tax Act, investors can claim up to ₹1.50 lakh as an exemption in a financial year, which translates into significant tax savings, especially for those in higher tax brackets.
Compared to other Section 80C instruments like the Public Provident Fund (PPF) or tax-saving fixed deposits, the ELSS funds' lock-in period is only three years. Because of the short lock-in and potential for equity-linked growth, ELSS funds are an attractive option for investors.
ELSS funds offer flexibility in investment amounts, allowing investors to start with as little as ₹500 and invest through Systematic Investment Plans (SIPs), which helps inculcate disciplined, regular investments and rupee-cost averaging. After the lock-in, there is no exit load, and withdrawals are relatively straightforward.
Despite these advantages, several misconceptions persist about ELSS. Some of those are mentioned below:
Another area of confusion is the lock-in period. While ELSS has a lock-in of three years, this applies to each investment or SIP installment, not the entire corpus as a whole. This means that if you invest monthly through SIPs, each installment will be locked in for three years from its respective date of investment.
Many investors mistakenly believe that they can redeem the entire ELSS investment after three years from the initial investment date, which is not the case.
One common misconception is underestimating the risk associated with ELSS investments. Unlike traditional tax-saving instruments such as PPF, ELSS fund returns are market-linked and not guaranteed.
The inherent volatility of equity markets means that ELSS fund investments can experience fluctuations and even losses in the short term.
Taxation on gains is another aspect that is often misunderstood. Gains from ELSS held beyond the lock-in period qualify as long-term capital gains (LTCG). However, LTCG above ₹1.25 lakh in a financial year is taxable at 12.5%.
Some investors assume that all ELSS returns are tax-free, which is incorrect. Understanding the taxation method is important for realistic post-tax return expectations.
ELSS funds are popular because they combine tax savings with the potential for attractive long-term returns and investment flexibility. However, misunderstanding the risks, lock-in rules, and taxation can lead to disappointment. For best results, treat ELSS Funds as a long-term wealth creation tool, not just a tax-saving quick fix, and invest with a clear understanding of their features and risks.
