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Tax-Saving Mutual Fund: Investing in the equity market can yield good returns, and conservative investors often gain equity exposure in their portfolios through mutual funds. However, a drawback is that investments in most mutual funds do not qualify for tax deductions—except for one specific option. Here, we discuss that specific option: ELSS (Equity Linked Savings Scheme). Investing in ELSS offers the potential for strong returns that beat inflation; receiving tax benefits does not mean the returns will be lackluster compared to other mutual fund options. Additionally, among all tax-saving avenues available under Section 80C of the Income Tax Act (within the old tax regime), ELSS has the shortest lock-in period.

What are the tax benefits of investing in ELSS?

Under the old tax regime, investments in ELSS mutual funds allow you to claim a deduction of up to ₹1.50 lakh per financial year under Section 80C of the Income Tax Act.

Tax is applicable on gains realized upon redemption: Long-Term Capital Gains (LTCG)—profits exceeding ₹1 lakh—are taxed at 10%, while Short-Term Capital Gains (STCG)—gains from holdings redeemed in less than a year—are taxed at 20%.

There is no TDS (Tax Deducted at Source) on the redemption of ELSS units.

What are the other features besides tax benefits?

ELSS is the only mutual fund scheme that offers tax benefits. Another key feature is that among the various investment options available under Section 80C, ELSS has the shortest lock-in period; for instance, while PPF has a 15-year lock-in and tax-saving FDs have a five-year lock-in, ELSS requires a lock-in of only three years.

There is no exit load charged when selling units after the ELSS lock-in period ends.

You can choose to invest a lump sum amount or build a substantial corpus over the long term through an SIP (Systematic Investment Plan) by investing smaller amounts at regular intervals.

How do the returns compare?

ELSS offers impressive returns. Looking at three-year performance figures, funds have grown at the following annual rates: Motilal Oswal ELSS Tax Fund Direct Growth (23.84%), ITI ELSS Tax Saver Fund Direct Growth (19.45%), WhiteOak Capital ELSS Tax Fund Direct Growth (18.63%), HSBC ELSS Tax Saver Fund Direct Growth (18.34%), and JM ELSS Tax Saver Fund Direct Growth (18.27%).

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