WHAT IS AN EQUITY LINKED SAVINGS SCHEME AND HOW DOES IT WORK

Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund that invests mainly in equities, helping investors build long-term wealth while availing deductions under Section 80C. It stands out as one of the most flexible and rewarding tax-saving investments because of following reasons:

●        Eligible for tax deductions up to ₹1.5 lakh under Section 80C

●        Comes with the shortest lock-in period of 3 years

●        Allocates 80% or more to equities for higher growth opportunities

●        Offers diversification to help manage market risk

●        Allows investment through SIP or lump sum based on convenience

Are you looking to enhance your wealth while availing tax deduction benefits? Then you will be happy to know that the government has offered an ideal product for you. Equity-Linked Saving Schemes (ELSS) is an equity-based mutual fund that helps investors gain wealth, get significant returns, and save a notable amount on taxes. Under Section 80C of the Income Tax Act, these schemes offer investors tax deductions of up to Rs.1,50,000 from their annual taxable income.

What Is an Equity Linked Savings Scheme (ELSS)? 

Equity-Linked Saving Schemes are the only type of mutual funds that are eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. You can claim a tax rebate of Rs.1,50,000 and potentially save up to Rs. 46,800 yearly in taxes by investing in ELSS mutual funds.

These types of mutual funds mostly allocate at least 80% of their portfolio to equities and equity-linked instruments, while the remaining portion possibly invested in debt. The best thing about these funds is that they offer a lock-in period of just three years, which is the shortest among all Section 80C investment alternatives.

How Does an ELSS Work? 

The following points describe how these ELSS mutual funds actually work:

●        ELSS mutual funds mostly invest in stocks of various companies from several market capitalizations and sectors.

●        The investment made in this scheme is diversified across stable sectors, which has reduced the risk factor associated with the investing on a single sector or company

●        When investors opt for this policy, their fund managers assure them that they choose companies or sectors by performing thorough market analysis. This enables investors to get balanced risk-adjusted returns.

●        Every year, investors can claim a deduction amount of Rs. 1.5 lakhs under Section 80C.

Key Features of ELSS Funds 

ELSS funds are valuable for investors as they offer a blend of growth potential and tax efficiency to the portfolio of investors. Here are some key features and benefits of these financial schemes:

●        Tax Benefits under Section 80C: ELSS mutual funds are popular for offering significant deduction of up to Rs. 1.5 lakh to investors under Section 80C of the Income Tax Act. This feature makes them an effective tool for tax planning and wealth generation simultaneously.

●        Equity Exposure: These schemes mostly invest in equities, offering a wide exposure to the stock market.

●        Shortest Lock-in Period: ELSS saving schemes have a mandatory and shortest lock-in period of 3 years. This provides investors with greater flexibility for planning long-term investments.

●        Higher Returns: As ELSS funds are equity-oriented, they possess the potential to deliver higher returns based on market performance compared to traditional tax-saving investments such as, NSC, PPF, NPS VPF etc.

●        Diversified Portfolio: ELSS mutual funds invest across a wide range of sectors and market capitalizations that help reduce risk associated with concentrated investments.

●        Flexibility in Investment Modes: These schemes offer investors mostly choose between SIPs (Systematic Investment Plans) and lumpsum investments based on their financial preferences.

●        Offering Greater Flexibility: ELSS mutual funds operate under the regulations of Securities and Exchange Board of India (SEBI) which offers greater transparency and adherence to investment guidelines.

What are the Tax Benefits Offered by ELSS funds?

Equity-Linked Savings Schemes provide notable tax benefits such as:

●        Tax Deduction Under Section 80C: ELSS investments made within a financial year qualify for tax deductions of up to ₹1.5 lakh, helping you lower your taxable income.

●        Long-Term Capital Gains (LTCG) Tax: ELSS gains are taxed under the LTCG category at 12.5%, applicable on annual capital gains exceeding ₹1.25 lakh.

ELSS SIP or Lump Sum: Which One Is Better?

Feature	ELSS SIP	ELSS Lump Sum
Investment Frequency	Regular, fixed amounts at chosen intervals (for say, monthly).	A single, one-time large investment.
Investment Discipline	Inculcates a disciplined saving and investing habit over time.	Requires having a large corpus available for immediate deployment.
Market Timing	Does not require market timing; the investments are spread out over time.	Requires detailed assessment of market conditions to maximize returns.
Risk Associated	They are ideal for initial investors or beginners.	Suitable for experienced investors with a high-risk appetite.
Lock-in Period	Each installment has a separate 3-year lock-in from its respective investment date.	The entire investment is locked in for 3 years from the date of the single investment.
Flexibility	Offers flexibility to pause, stop, increase, or decrease the investment amount.	It is less flexible. The entire amount is committed at once.
Potential Returns	Consistent investing allows good performance even in unfavorable market conditions.	Potential for higher returns if invested during a market downturn or a stable bull run.

How to Choose the Best ELSS Funds?

It is important to consider some certain factors before you plan to invest in ELSS mutual funds:

●        Assess long-term performance: Review the fund’s 5–10 year returns and compare with other investment options to acquire the knowledge about stability and consistency.

●        Evaluate fund managers: Look at their experience, track record, and investment style to ensure skilled handling of your money.

●        Check the expense ratio: Lower mutual fund costs help you retain more returns, especially over long investment horizons.

●        Review risk metrics: Consider indicators like “Sharpe ratio and beta” to understand risk-adjusted performance.

●        Examine portfolio diversification: Ensure the fund has balanced sector and stock allocation to reduce concentration risk.

●        Consider AUM size: Steady or growing AUM signals investor trust, though very large AUM can limit flexibility.

●        Match investment goals: Choose a fund whose strategy aligns with your long-term objectives and risk tolerance.

Comparison between ELSS vs PPF vs FD vs NPS        

There are several tax-savings schemes to help investors gather more wealth over a period of time, including PPF, FD, NSC, and many more. However, in ELSS the returns are significantly higher, especially during the peak market performance. The table below presents how ELSS is a better option than any other investment options:

Investment	Returns	Lock-in Period	Tax on Returns
5-Year Bank Fixed Deposit	4% to 6%	5 years	Yes
Public Provident Fund (PPF)	7% to 8%	15 years	No
National Savings Certificate (NSC)	7% to 8%	5 years	Yes
National Pension System (NPS)	8% to 10%	Till Retirement	Partially Taxable
ELSS Funds	15% to 18%	3 years	Partially Taxable

Who Should Invest in ELSS? 

Following are the types of investors who can get maximum benefits from ELSS, based on their goals and risk profiles:

●        Salaried individuals

●        First-time equity investors

●        Taxpayers seeking long-term growth

●        Investors who are comfortable, take moderate to high-risk tolerance

Endnote

ELSS funds are ideal for tax savings, wealth creation, and long-term growth for diverse investors. With their short lock-in period, equity exposure, and potential for higher returns, they serve as an efficient tax-planning tool compared to traditional options. Whether you’re a beginner or an experienced investor, ELSS can help you build a disciplined investment habit, aligning with your financial goals and risk appetite for long-term prosperity.

Looking for smart tax saving choices? Join hands with Quickinsure to simplify your financial planning and explore ELSS funds effortlessly to expand your savings!

FAQs:

1. Is ELSS eligible for tax benefits?

Ans - Yes, ELSS investments offer tax deductions of up to ₹1.5 lakh under Section 80C.

2. What is the lock-in period for ELSS funds?

Ans - ELSS has a mandatory lock-in period of just 3 years, the shortest among Section 80C options.

3. Can I invest in ELSS through SIP?

Ans - Yes, you can invest via SIP, and each SIP installment carries its own 3-year lock-in.

4. Are ELSS returns guaranteed?

Ans - No, ELSS returns depend on market performance since they primarily invest in equities.

5. Are ELSS funds risky?

Ans - ELSS carries market-linked risks since it invests mainly in equities, but diversification helps manage risk.

Published On - 19/12/2025