How you can avail tax benefits of up to Rs 46,800 with ELSS

Anchal stayed up all night reading about the benefits of equity mutual funds. In the morning, she calls up her friend, Tavleen, to share her findings.

“Equity mutual funds are such a convenient way to invest in the stock market! I can’t wait to invest in them,” Anchal exclaims excitedly.

“That’s great, Anchal! Have you also considered ELSS mutual funds?” Tavleen asks.

“Are they a type of equity mutual fund? I don’t think I read about them.”

“Yes, they are, and you can save tax with ELSS mutual funds. A lot of investors looking to add equity exposure to their portfolio invest in them to enjoy ELSS tax benefits,” Tavleen explains.

“That’s interesting! But how much tax benefit on ELSS is available and why ELSS funds are tax free?” Anchal asks.

Tavleen and Anchal decide to meet for breakfast and discuss ELSS tax benefits. If you, like Anchal, are wondering why ELSS funds are tax free as compared to other mutual funds, the catch is this – they have a three-year lock-in period. And if you’re wondering how you can save tax with ELSS, this is the piece for you.


How much tax benefit on ELSS can you get?

When trying to figure out the answer to how much tax benefit on ELSS you can get, it’s essential to understand the points of taxation. The first is when you make the ELSS investment. The second is when you earn returns or sell your ELSS mutual funds.

  • ELSS tax benefit on investment

For the first point of taxation, your contribution to your ELSS investment is eligible for a tax deduction of up to Rs. 1.5 lakh per year along with other eligible investment. You can claim this deduction under section 80C of the Income Tax Act, 1961. What this means is that if you invest Rs. 2 lakh in ELSS mutual funds, you can deduct Rs. 1.5 lakh out of that from your taxable income. Hence, this ELSS tax benefit allows you to lower your taxable income, thereby reducing your tax liability.

Another benefit of ELSS mutual funds is that you don’t need to invest the entire Rs. 1.5 lakh in one go to avail ELSS tax benefits. You can also opt for a Systematic Investment Plan (SIP) option and invest that amount over a period of one year with each SIP amount being Rs. 12,500 and still enjoy ELSS tax benefits.

It’s also alright if you invest less than Rs. 1.5 lakh in ELSS mutual funds in a year because the section 80C benefit is applicable for some other investments too and you can still claim the entire deduction if you’re investing in those instruments. Hence, ELSS tax benefits come with a lot of flexibility.

If you fall under the highest tax bracket and invest Rs 1.5 lakh in ELSS funds in a financial year, you can avail benefits of Rs 46,800*.

  • ELSS tax benefit on returns

Now, as for the returns on your ELSS mutual funds, they are not completely tax free. That’s because the Long-Term Capital Gains (LTCGs) tax is applicable on ELSS investments. Capital gains for equity investments are categorised into long-term and short-term. Gains on equity investments held for more than 12 months or 1 year are considered as LTCGs and are taxed at 10%. Since the lock-in period for ELSS mutual funds is three years, the gains on them are automatically considered LTCGs. However, your LTCGs on ELSS mutual funds are exempt up to Rs. 1 lakh.

Capital gains are what you make when you sell your ELSS units for higher than what you had purchased them for and make a profit. For equity investments such as ELSS mutual funds, LTCGs tax is calculated without indexation benefit. Indexation benefit is available for capital gains and it allows the investor to recalculate the purchase price of their investment to account for inflation and thereby reduce their capital gains for tax purposes.

The three-year lock-in period that makes ELSS mutual fund gains LTCGs is beneficial because Short-Term Capital Gains (STCGs) on equity investments are taxed at a higher rate of 15%. This is also something to consider when wondering how much tax benefit on ELSS you can receive.


ELSS tax benefits vs other tax-saving instruments


Investment Lock-in period Returns Tax on returns
ELSS 3 years 15% to 18% Partially taxable
NPS Till retirement 12% to 14% Partially taxable
PPF 15 years 7.10%  Tax-free subject to conditions
ULIP 5 years 8% to 12%  Tax-free subject to conditions
Fixed deposit 5 years 5% to 6%  Fully Taxable
NSC 5 years 7% to 8% Fully Taxable


  • Lowest lock-in period

Out of all the tax-saving schemes out there, ELSS funds have the lowest lock-in period, and hence the most liquid. Investments like NPS and PPF have lock-in periods that run into decades. Once the three-year lock-in period of your ELSS funds is over, they turn into regular open-ended equity mutual funds, and you can decide to sell your ELSS mutual fund units. Hence, when you save tax with ELSS, your money is not locked away for years on end. Alternatively, you can also choose to stay invested post the lock-in period if your ELSS mutual funds are performing well.

  • Possibility of good returns

When you save tax with ELSS mutual funds, you are also building wealth because ELSS mutual funds are a great investment from a return standpoint too. ELSS mutual funds invest at least 80% of their total assets in equity and equity-related instruments. This means that when you invest in ELSS, you get to enjoy market-linked returns, which could be higher than other tax-saving instruments.


Reasons to invest in ELSS other than tax benefits

Other than to save tax with ELSS, here are other reasons you should consider investing:

  • Diversification

When you invest in an ELSS mutual fund, you are investing in stocks of multiple companies. So, the performance of your fund isn’t solely based on the performance of one company. ELSS mutual funds also invest in stocks of companies across various sectors and market capitalisation and that further hedges the risk of market volatility.

  • Professionally managed

ELSS funds, like regular mutual funds, have a fund manager. This fund manager is an expert and makes all the important investment decisions such as when to buy, hold, and sell underlying securities to capitalise on market conditions and meet the fund objective effectively. Hence, you don’t need to have immense knowledge of the stock market to benefit from investing in equity through ELSS mutual funds.

  • Low minimum investment amount

When you opt to invest in ELSS mutual funds through the SIP option, you can start with as low as Rs. 500. This means that you don’t need to wait until you have a large amount of money saved to begin investing in ELSS.



Now that you know how to save tax with ELSS mutual funds, you should consider investing in them when you want to add equity exposure to your investment portfolio. Yes, they do have a lock-in period; however, a long investment horizon is generally recommended for equity investments, to begin with. That’s because equity investments are vulnerable to market fluctuations that can have a significant impact on your investment in the short term but can be ironed out in the long term. So, with ELSS mutual funds, you can make strategic equity investments while also enjoying ELSS tax benefits.

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

*Tax benefit is for indicative purpose only. Tax laws are subject to amendment from time to time. Tax benefit is calculated assuming that the net total income is below Rs.50 lakhs and is chargeable to tax at 31.20%.The above information is for general understanding and reference. This is not legal or tax advice and users are advised to consult their tax advisors before making any decision or taking any action.



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