Tax saving mutual funds have become very popular these days that offer added tax-saving benefit under section 80C of the Indian Income Tax Act. Equity Linked Saving Scheme or ELSS is a diversified equity mutual funds and the only mutual fund which qualifies for a tax deduction. Among all the tax-saving investment options including NPS (National Pension System), PPF (Public Provident Fund), NSC (National Savings Certificate), fixed deposits, ELSS features the shortest lock-in period of 3 years. This mutual fund offers you greater flexibility in the medium term with returns ranging between 15%-18%.
Even in Equity Linked Saving Scheme, an investor gets the benefit of the power of compounding as this is the only tax-saving instrument that comes with a SIP where an investor can invest an amount as low as Rs. 500 in an ELSS.
Taxation Benefits
According to Section 80C of the Income Tax Act, investments made in of up to Rs. 1.5 lakh for qualifies for an income tax deduction. Amount of your investment in an ELSS can be deducted from your total income in order to eventually reduce your total taxable income.
How ELSS Is Taxed?
An investor can generate earnings from ELSS in two forms- capital gains and dividend. Capital gain is the difference between the purchase price and the redemption value. According to the Income Tax Act, the capital gains are divided into two parts: Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). The holding period of STCG is 1 year and therefore ELSS does not result in this as it comes with a lock-in of 3 years. ELSS are taxed at the rate of 10% on LTCG where an investor gets a tax exemption of up to Rs. 1 lakh per year on all equity funds.
In terms of indexation, ELSS does not qualify in that. Only debt funds get the benefit of indexation. Indexation is when the purchasing price of an investment is adjusted to factor in inflation.
Minimum And Maximum Investments In An ELSS
The amount of investment that can give best returns varies from scheme to scheme. Generally, the minimum amount of in an ELSS for SIP investments is Rs 500 and 5000 for lump sum investments. There is no maximum amount of investment in any mutual fund scheme. Investment of Rs 1.5 lakh can be made to get tax benefits.
Options For Investing In ELSS
There are two options of investing in mutual fund- dividend option and growth option.
Under the dividend option, an investor gets timely benefits in the form of dividends that are declared when there are excess profits. Choosing the growth option over dividend is the better option for investors who want to take tax as dividends on equity are subject to Dividend Distribution Tax (DDT) at 10%.
Under the growth option (capital gains), the investor gains at the time of redemption. This helps to appreciate the total net asset value and thus multiplies the profit. The only disadvantage is that the returns are subject to market risk which may not work in the investor’s favour every time.
Who Should Invest In ELSS Mutual Fund?
ELSS Mutual Fund is suitable for those who have the appetite to take risks and stay invested with a long term perspective in the market. Any individual or HUF can invest in Equity Linked Saving Scheme.
Top ELSS Tax Saving Funds For FY 2019-20
| Top ELSS Funds | Launch | 1-Year Returns | 3-Year Returns | 5-Year Returns |
| Aditya Birla Sun Life Tax Relief 96 | Mar-1996 | 8.18% | 11.12% | 12.25% |
| Axis Long Term Equity Fund | Dec-2009 | 20.35% | 15.50% | 13.45% |
| Invesco India Tax Plan | Dec-2006 | 13.17% | 12.68% | 12.22% |
| Tata India Tax Savings Fund | Mar-1996 | 18.16% | 12.37% | 13.77% |
| Kotak Tax Saver Fund | Nov-2005 | 15.41% | 10.84% | 11.32% |
| DSP Tax Saver Fund | Jan-2007 | 19.28% | 11.37% | 12.19% |
| Franklin India Tax shield Fund | April 1999 | 8.43% | 8.30% | 9.19% |
| Tata India Tax Savings Fund | Mar-1996 | 18.16% | 12.37% | 13.77% |
| L&T Tax Advantage Fund | Feb-2006 | 2.97% | 9.08% | 9.59% |
How You Can Evaluate The Best ELSS Mutual Fund?
While selecting the best ELSS mutual fund, one should always compare the fund performance that the fund has been consistent over the past years with the peer competitors. Go through the fund history and read the portfolio. Whether the fund delivers high returns or stocks performance is high are the key areas which are required to be taken care of.
Expense ratio is the most important part as it depicts how much of your investment goes towards managing the fund. Choose that fund which has less expense ratio as that will translate into higher take-home returns.
Consider various parameters such as Alpha, Beta, Standard Deviation, Sharpe ratio to analyses the performance of a fund. A fund having a higher beta and standard deviation is risky. Mutual funds having higher Sharpe Ratio offer higher returns for each additional risk you take.
