5 common myths about ELSS investments

The net Assets Under Management (AUM) of open-ended equity mutual funds in India as on 30th November 2021 is Rs. 12,78,248.76 crore. Out of this, Rs. 1,46,246.60 crore is the AUM of ELSS funds. ELSS mutual funds or Equity-linked Saving Scheme is a type of equity mutual fund that is becoming popular with investors because of the dual benefits it offers. You can invest in it to grow your wealth while at the same time use it for tax-saving purposes. However, there are many misconceptions about ELSS investments out there that you need to unlearn if you have come across them already. These myths about ELSS, if not busted, may stop you from investing in ELSS mutual funds in a beneficial and effective way.

Myth #1: ELSS mutual funds are only a 3-year investment

ELSS mutual funds have a lock-in period of three years. One of the biggest myths about ELSS is that the funds automatically mature after this period. However, this lock-in period simply means that you cannot withdraw your funds before three years. All tax-saving schemes come with a lock-in period of different durations. Once the lock-in period is over, your ELSS mutual funds become regular open-ended equity funds and you can redeem your units whenever you would like.

Your ELSS investment horizon, the time you choose to stay invested in ELSS mutual funds, can be as long as you’d like and doesn’t have to end with the lock-in period. In fact, just like other equity funds, if your ELSS funds are preforming well, it may be more beneficial if you stay invested for the long term.

Myth #2: You cannot invest more than Rs. 1.5 lakh in ELSS

Another misconception about ELSS investments is that you need to cap your ELSS investment at Rs. 1.5 lakh. This confusion might be because the tax benefit under section 80C of the Income Tax Act, 1961 allows a maximum deduction of Rs. 1.5 lakh for ELSS mutual funds, and other eligible tax-saving instruments, per year. While your tax benefits from ELSS investments are capped at Rs. 1.5 lakh each year, you can choose to invest as much as you would like.

It’s important to remember that while ELSS mutual funds are a great tax-saving option, they can also make for a good investment that could help grow your wealth. So, if the ELSS funds you are investing in are performing well, there’s no need to limit your investment to Rs. 1.5 lakh.

Myth #3: ELSS mutual funds require a lump sum investment

Due to the tax benefits, another common misconception about ELSS investments is that you need to invest in one go. In reality, you can choose to opt for a Systematic Investment Plan (SIP) even for ELSS mutual funds and still capitalise on the section 80C deduction. Instead of investing Rs. 1.5 lakh or more in a lump sum, you can invest Rs. 12,500 through SIP monthly.

You can also start with an SIP of as low as Rs. 500 for your ELSS investments. So, don’t let this myth about ELSS that you need a high minimum investment stop you or delay you from investing in ELSS mutual funds. It’s also essential to remember that the section 80C benefit is for a range of investments combined so even if you invest less than Rs. 1.5 lakh in ELSS mutual funds, you can still claim the entire deduction if you are also already investing in other tax-saving schemes.

Myth #4: Returns on ELSS mutual funds are tax free

The reason why this misconception about ELSS investments exists is because until a few years ago it was true. However, now Long-Term Capital Gains (LTCGs) tax is applicable on ELSS mutual funds. For any type of equity funds, if they are held for more than 36 months, a 10% (plus applicable surcharge and cess) LTCG tax is applicable on them.

This myth about ELSS mutual funds is important to understand because while it is a tax-saving instrument, it’s not exempt from tax completely at all stages. However, Long Term capital gains of up to Rs. 1 lakh on ELSS investments along with other Long Term Capital Gain on other investments in equity and equity oriented fund are not subjected to LTCG tax. So, this means that if your long term capital gains during the financial year  in which ELSS funds are sold is  Rs. 2 lakh, you will only have to pay 10% (plus applicable surcharge and cess) on Rs. 1 lakh, which would be Rs. 10,000 (plus applicable surcharge and cess).

Myth #5: ELSS investments are complex

Out of all the myths about ELSS, this one is perhaps the most popular. The truth is that ELSS mutual funds are just like equity mutual funds but with a lock-in period and tax benefits. In the way of tax benefits, they actually have an edge over regular equity funds. The lock-in period is merely a part and parcel of that.

ELSS mutual funds come with all benefits of a general equity mutual fund. You do not need a demat account to invest in them and they offer a safer, diversified way of investing in the stock market. You can choose between different types of ELSS mutual funds based on your goals and your investment will be managed by an expert fund manager.


Now that you have seen how off these myths about ELSS investments are from reality, you may want to consider consulting a financial advisor before making investment decisions. A lot of people will say a lot of things about different investment products but not all that information is informed. Hence, you should ensure to cross-check it with reliable sources that can guide you correctly in your investment journey.

To explore ELSS or tax-saving funds, click here.


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