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Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that primarily invests in equity and equity-related instruments. It offers tax benefits under Section 80C of the Income Tax Act, making it a popular choice among salaried employees looking to save tax while building long-term wealth.
Key Features of ELSS
Lock-in Period
- Shortest mandatory lock-in period (3 years) among all tax-saving instruments under Section 80C
- Lock-in applies to each investment separately (SIP installments locked individually)
- No premature withdrawals allowed during lock-in period
Tax Benefits
- Eligible for deduction under Section 80C up to ₹1,50,000 per financial year
- Long-term capital gains (LTCG) above ₹1 lakh taxed at 10%
- Dividends taxed as per individual's tax slab
Investment Options
- Lump sum investment
- Systematic Investment Plan (SIP)
- Minimum investment amount varies from ₹500 to ₹5,000 depending on the fund
Investment Strategy and Examples
Example 1: Monthly SIP Investment: Priya, a software engineer, invests through monthly SIP:
- Monthly SIP amount: ₹12,500
- Annual investment: ₹1,50,000
- Tax savings (30% tax bracket): ₹45,000
- Assumed returns: 12% p.a.
After 10 years:
- Total investment: ₹15,00,000
- Expected corpus: ₹23,25,000 (approximate)
- Effective cost of investment: ₹10,50,000 (after considering tax savings)
Example 2: Lump Sum vs SIP Comparison: Rajesh has ₹1,50,000 to invest in ELSS:
Lump Sum Investment:
- One-time investment: ₹1,50,000 (April)
- Tax saving: ₹45,000 (30% tax bracket)
- Lock-in ends: After 3 years from investment date
SIP Investment:
- Monthly investment: ₹12,500
- Tax saving: Same ₹45,000
- Lock-in ends: 3 years from each installment
- Better rupee cost averaging
- Protection against market volatility
How to Choose the Right ELSS Fund
Key Factors to Consider
Fund Performance
- Track record over different market cycles
- Comparison with benchmark indices
- Risk-adjusted returns
Portfolio Composition
- Market capitalization allocation
- Sector diversification
- Top holdings
Fund Manager Experience
- Track record
- Investment philosophy
- Fund management style
Best Practices for ELSS Investment
Investment Planning
- Start early in the financial year
- Avoid last-minute tax-saving investments
- Consider SIP for better averaging
- Align with overall financial goals
Documentation Required
- PAN card
- KYC documents
- Bank account details
- Form 16 (for tax proof)
Common Mistakes to Avoid
- Investing solely for tax saving
- Not considering fund performance
- Premature withdrawal attempts
- Stopping SIP after lock-in period
Taxation Details
During Investment
- Tax deduction under Section 80C
- Maximum deduction of ₹1,50,000
- Deduction available in the year of investment
On Redemption
Long-term Capital Gains (LTCG)
- 10% tax on gains above ₹1 lakh
- No indexation benefit
Dividend Distribution
- Taxed as per individual's tax slab
- Added to total income
Comparison with Other Tax-Saving Instruments
Risk and Returns
ELSS
- Higher risk
- Potentially higher returns
- Market-linked returns
- Low risk
- Fixed returns
- 15-year lock-in
Tax-saving FD
- Low risk
- Fixed returns
- 5-year lock-in
Tips for Maximum Benefits
Systematic Approach
- Start SIP early in the financial year
- Maintain investment discipline
- Review portfolio periodically
Long-term Perspective
- Continue beyond lock-in period
- Consider broader financial goals
- Monitor fund performance
Risk Management
- Diversify across multiple ELSS funds
- Balance with other investments
- Regular portfolio rebalancing
Digital Investment Process
Online Investment Steps
- Choose a reliable platform
- Complete KYC process
- Link bank account
- Set up SIP/make lump sum investment
Regular Monitoring
- Track performance online
- Download statements
- Monitor portfolio through apps
Remember to consult a financial advisor for personalized investment advice based on your specific financial situation and goals.