Category Archives: Tax Saving

Guide to investing in ELSS funds for tax saving

ELSS Funds

 What is ELSS?

The indisputable purpose of an investment is to save tax and realize growth in the invested money. In the recent years tax saving has become all the more important with the tax saving ceiling under section 80C raised to 1.5 lacs from 1 lac. The task of investing is often times viewed as daunting effort by many. The reason is not surprising, most of the people are unaware of the benefits that accrue with the kind of investment they are making and are also less familiar with the tax breaks that they can enjoy. Equity Linked Savings Scheme (ELSS) is a kind of investment, which offers the same tax-saving benefit and also offers an opportunity to make profit in Indian equity market. ELSS funds are akin to a diversified equity mutual fund investment.

Benefits of investing in ELSS Funds

ELSS is a great way of saving tax under section 80C. The investor can get a tax exemption up to Rs. 1.5 Lacs and at the same time gets a lucrative chance of investing in the equity market. One of the biggest upsides of investing in ELSS is that there is no tax on long-term profits from the investment. The benefits are not limited to the reasons above only; another benefit is that the lock-in period for ELSS investments is only 3 years. And to top it all, there are no taxes on withdrawals since long-term equity gains are exempt from taxation. Also unlike other investment plans and PFF, the investor does not need to commit to multi-year investments. Even if the investor makes a one-time investment, which could be even an amount as small as Rs. 500 can be held for the term of the investment. In most other investments the investor has to make at-least one payment in a year or else pay a penalty.

Below is a brief comparison of the benefits with other kinds of investments.


Parameter PPF NSC ELSS
Tenure 15 years 6 years 3 years
Returns (Compounded Annually)

8.80 % ^



8.60 to 8.90 % ^

Not assured dividends/ returns
Minimum investments Rs.500 Rs.100 Rs.500
Maximum investments Rs.1,50,000 No limit* No limit*
Amount eligible for

deduction under Section 80C

Rs.1,50,000 Rs 1,50,000 Rs 1,50,000
Taxation for interest  Tax free  Taxable Dividends and capital gain tax free
 Safety/ Rating  Highest  Highest  High Risk

Source: SBI Tax Saving

ELSS Caveats

ELSS investments are equity mutual funds and have all the risks associated with the equity market. With a lock-in period of 3 years the risk factor seems augmented in case of ELSS, but diversification of funds over a long period of time mitigates the associated risks. The good news is that the recent market analysis paints a much better performance picture for ELSS funds than the other diversified funds. ELSS funds have given an annual return of over 15%, whereas the diversified mutual funds over the same range of time have performed marginally lower than ELSS funds, at 14.3% annual returns (Source: TOI).

Also, 3-year lock-in period means less liquidity for the investor but it is a matter of solace for the fund manager who are reliable in making long term investment decisions. These decisions invariably turn out to be beneficial for the investor.

Some people like to take SIP route for their ELSS investment. In such an event, each SIP installment is regarded as a separate investment and each of these monthly installments is locked for a period of 3 years.  For example, if you make a SIP payment in January of 2016 then you will be eligible for a withdrawal only in January 2019. And for your next SIP installment in February 2016, the withdrawal time will be February of 2019. So if there is no constraint on how much you can invest, then investing a lump sum annually or quarterly is a better choice than to go for the SIP option.

Growth and Dividend Option

The investor has the choice of opting for either the growth option or the dividend option. Under the growth option there is a cumulative growth in the funds until the investment reaches maturity or is redeemed by the investor. The dividend option on the other hand, pays a dividend from time to time to the investor when the NAV performs positively and rises. These dividends paid to the investor are tax-free.

There is in fact another option, the dividend reinvestment plan. In most circumstances it is best to avoid such an option, as the dividends payout are reinvested in the equity market to buy more units which again have a lock-in period of 3 years. So every time a dividend is reinvested a lock-in period of 3 years is enforced on the reinvested amount. Making an exit under such a plan can be a big hassle as some amount will always be locked-in.

ELSS or Some Other Investment

ELSS being an equity fund comes with a higher risk factor and there is no guarantee on investment return. But taking into consideration the historical data and performance, the long-term performance benefits of ELSS have over-shadowed investment options like PPF, EPF and tax saving Fixed-Deposits. Long-term ELSS almost comes with an assured performance benefit. It is a recommendation of most experts to invest in ELSS.

Example –

Amount invested Rs. 1 lakh in an ELSS scheme for highest tax bracket

Income Tax saved = Rs. 30,000 (30% tax slab)

Net amount Invested = Rs. 70,000/- (Rs. 30,000 is deducted here since you are getting back this via tax benefits. So technically, you invested Rs. 70,000)

Average rate of investment growth -15% per annum

Investment sum for 1st year- 1,15,000/-

Investment sum for 2nd year- 1,32,250/-

Investment value for 3rd year- 1,52,087/-


Profit earned for 3 years- Rs. 82,087/- (Considering Rs. 70000 investment)

Profit percentage = 117% (For 3 years together)

Returns % per year = 39%

So effectively, this is really one of the best investments you can opt for!

Top ELSS Companies

Below is a table for the top 15 mutual funds performers that can be considered for ELSS funds. Results for 3 year growth are tabulated.


Mutual Fund Scheme 1 Year 2 Year 3 Year
ICICI Long Term Equity Tax Saving-DP-G  






Tat Long Term Equity Fund – Direct (G) 14.0%
Tata Long Term Equity Fund – Reg (G) 13.0%
Escorts Tax Plan – Reg (G) 10.5% 32.9% 16.7%
Birla SL Tax Relief 96 – Direct (G) 10% 30.9% 23.0%
Escorts Tax Plan (G) 9.8% 32.9% 17.5%
Birla Sun Life Tax Plan – Direct (G) 9.3% 29.9% 22.1%
Birla SL Tax Relief 96 (G) 9.2% 30.1% 22.3%
Tata Tax Advantage Fund – 1 (G) 8.6% 25.8% 18.6%
IDFC Tax Adv. (ELSS) – Direct (G) 8.4% 24.8% 21.2%
Birla SL Tax Savings (G) 8.3% 26.7% 17.8%
Birla Sun Life Tax Plan (G) 8.3% 28.8% 21.2%
Birla SL Tax Saving – Direct (G) 8.2% 27.3% 18.6%
Tata Long Term Equity Fund – Reg (D) 8.0% 24.3% 16.3%
Religare Invesco Tax Plan – DP (G) 7.7% 29.7% 22.6%


Source: ELSS Top Performers


Tata and Birla mutual funds are among the top performers. If some one is interested in investing ELSS funds and make good gains in the long run then investing in established mutual funds like those of Tata’s and Birla’s is a good choice. There is a double-digit percentage gain for 2 or more years of investment.