Equity Linked Savings Scheme- Meaning, Features and Tax benefits

Our parents have taught us to save our earnings in savings accounts. But, did you know that you can depreciate the value of your money by keeping it in savings accounts while paying more taxes?

Let’s understand how this happens:

Currently, the inflation rate is around 6% and on average, a savings account gives you 3.5% interest. 

By “saving” your money in a savings account you cannot beat inflation and the value of your money depreciates over time. So, to beat inflation, you need to ‘save’ your money in the right investment option. If your financial goal is to create wealth by beating inflation and getting tax benefits, then you must consider saving in an Equity Linked Savings Scheme. 

In this article, we will learn more about Equity Linked Savings Scheme (ELSS) and how you can: 

✅Save Tax up to Rs. 46,800 under section 80C      

✅ Get higher returns up to 17-18%  

✅ Shortest Lock-in period of just 3 years

What is ELSS?  

Equity Linked Savings Schemes (ELSS) are equity mutual funds that invest a large chunk of their accumulated corpus into equity instruments like stocks. ELSS funds act as tax-saving schemes since they offer tax benefits of up to Rs. 150,000 from annual taxable income under Section 80C. ELSS thus offers dual benefits, you can beat inflation while saving money you would pay in taxes.

Equity Linked Saving Schemes comes with a mandatory lock-in period of three years, which is the lowest among all other tax-saving methods listed under Sector 80C. Over the last decade, ELSS has gained immense popularity among salaried investors and also among other taxpayers. Under Section 80C, you can claim tax benefits for your investments in ELSS. The invested limit that you can claim under Section 80C isof section 80C is Rs. 1,50,000.  It must be noted that the income under the scheme at the end of the 3-year tenure will be considered as a long-term capital gain (if it exceeds Rs. 1,00,000) and will be taxed at 10%.

 Key features of ELSS/ Advantages of ELSS:  

1. Shortest Lock-in Period: ELSS has the lowest lock-in period of 3 years among all the other tax saving options. 

2. Higher Returns: ELSS as compared to other investment options in this category gives a much higher return as it is market-linked. Certain Equity Linked Saving Schemes have given more than 15% in returns. This will help you beat inflation which is about 6%.  

3. Lower Tax on Capital Gains: Capital gains under ELSS is taxed at a lower tax rate. Long-term capital gain from ELSS is tax exempted up to Rs. 1 lakh and if the amount exceeds Rs. 1 lakh then it is taxed at a rate of 10%. 

4. Low initial investment cost: You can start your investment from Rs. 500 and scale as per the requirements. 

Things you must consider while investing in ELSS:

With all the different ELSS schemes, and all claiming high returns on investment it might be baffling for a new investor to find a middle ground between risk and returns. Hence, we have created this checklist for you. 

 Let’s have a closer look:  

1. History of the AMC or fund house – In recent years, many asset management companies have come up with new schemes but it is always advised to choose schemes that have shown consistent performance over the last 8 to 10 years.

2. Fund Returns and Portfolio – Before choosing any fund it is advisable to analyze the performance of the fund in comparison to the other funds in the same category and also with the benchmark. Investors should also take note of the top stock holdings in the portfolio.

3. Fund Manager’s Performance – Investors should take a closer look at the performance of the fund manager in the previous years. If the fund manager is not competent in choosing the right stocks, then the overall return suffers.

4. Other Parameters - As an informed investor one should consider several other parameters as Standard Deviation, Sharpe Ratio, Alpha, and Beta to analyze the performance of a fund. 

How you can get a Tax Benefit of up to ₹46800 from ELSS:   

A taxpayer can claim up to ₹1,50,000 tax benefit under section 80C of the Income Tax Act, 1961, which leads to upt Rs 46,800 in Tax Savings as shown below

At the Highest Tax Bracket under the old regime

Since the return from ELSS is considered as Long-Term Capital Gain (investment period more than 12 months), the capital gain from ELSS will be taxed at 10%. If the capital gain is under ₹1 lakh then it is completely tax exempt.

Why ELSS is better than other tax saving options

There are numerous tax saving options under section 80C like National Pension System (NPS), Fixed Deposit (FD), Public Provident Fund (PPF), etc. The chart below shows the comparison between ELSS and other tax saving options:

Chart showing Compound Returns of ELSS Funds

* Please note. Returns are linked to the market and are thus subjected to Market Risks.

How to open an ELSS account?  

You can register on Bajaj Capital's OnlineMF platform and start investing in an ELSS fund today!

Bajaj Capital OnlineMF Platform