ELSS Funds: A Unique Blend Of Tax Benefits And Wealth Creation

March 31st is the cut-off date to complete tax saving investments every financial year and with less than 90 days left to close our books of accounts, now is the time to minimise your tax liability. In this context. equity-linked savings schemes or ELSS funds are a unique mutual fund offering that can not only help investors save tax but also grow their wealth. First things first: Investments in ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act. By investing up to ₹1,50,000 in an ELSS fund, investors in the highest tax bracket can save up to ₹46,800 a year in taxes. [EasyDNNnews:PaidContentStart]

Additionally, ELSS funds are one of the few equity-based tax saving instruments in the country with at least 80 per cent or more of their portfolio invested in Indian shares. With India growing, the Indian equity markets are a sensible way for the layman to participate in this growth. Equity investing enables one to become part owner in listed Indian businesses, reaping the benefits of their growth in the form of higher share prices. Given that the stock markets are down by approximately 10 per cent from their 2024 highs, now is an opportune time to accumulate Indian equities and ELSS funds, which are equityoriented and will help investors participate in India’s economic momentum. 

ELSS funds can be a good way for investors to diversify away from traditionally preferred tax-saving avenues like Public Provident Fund, National Savings Certificate and tax-saving bank fixed deposits, and get a taste of the equity markets. For those looking to beat inflation and build long-term wealth, ELSS funds are preferable because their equity underlying has historically enabled them to outperform aforementioned debt-based tax saving investments and inflation. 

While unit-linked insurance plans (ULIPs) are also partly equity-based, they tend to generate lower returns than ELSS funds because of their higher charges and because a part of the investment goes toward providing insurance coverage. National Pension System, which is also an equity-based tax saving avenue, has a lock-in period till the individual turns 60 and allows only partial withdrawals before that, compared to ELSS funds’ three-year lock in. In the case of Public Provident Fund, tax-saving bank fixed deposits and National Savings Certificate, the lock-in period is 15 years, five years and five years, respectively. 

For investors who value the ability to easily liquidate their investments, ELSS funds are attractive, having one of the shortest lock-in periods among various tax-saving avenues. While the investment outlook for 2025 is constructive, it is unlikely to be a smooth ride. As such, the Indian equity investor will need to find a way to endure the upcoming volatility in order to not disrupt their long-term investments. The lock in period of ELSS funds ensures that investors stay invested for a minimum period of three years, which is essential as equity as an asset class requires longer investment horizons to counter the inherent volatility of stock markets. 

By investing in ELSS funds in the current scenario, investors can avoid falling prey to panic or fear during the expected market volatility, letting their money compound undisturbed to meet long-term goals. Because of the three-year lock-in period, the short-term capital gains tax does not apply to ELSS investments. Gains from ELSS mutual funds attract a long-term capital gains tax of 10 per cent without the benefit of indexation. If the gains are less than ₹1 lakh annually, they are not subject to tax. Investments in ELSS funds can start with just ₹500 and unlike some tax-saving avenues like Public Provident Fund, there is no upper limit on the investment amount. 

However, the deduction for tax-saving purpose will be limited to ₹1,50,000. Investors can also opt for systematic investment plans (SIPs) in ELSS funds to lower their average purchase cost. ELSS funds are suitable for those looking to minimise their tax out-go, who have the risk appetite to invest in equities, who have a long investment horizon, and for those who do not need the funds for at least three years. The potential for higher returns and higher liquidity have made ELSS funds a preferable tax-saving investment over the years. This has propelled the assets under management for ELSS category to 2.46 lakh crore as of December 2024. 

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