How To Invest In Equity Linked Funds To Receive Tax Benefits

Edited by Nikita Prasad

10 Apr 2021, 06:07 PM IST

Equity-Linked Savings Scheme: ELSS mutual funds come with a lock-in period of three years

An equity-linked savings scheme or ELSS is one of the most popular mutual fund categories that offer tax benefits. Under provisions of Section 80C of the Income Tax Act, 1961, one is eligible for claiming tax deductions of up to Rs 1.5 lakh in taxes by investing in equity-linked saving scheme. ELSS mutual funds come with a lock-in period of just three years, which is far lesser, compared to the other tax-saving instruments. According to stocks and mutual fund investment platform Groww, apart from offering tax-saving benefits, ELSS is a diversified equity mutual fund and also serves the purpose of long-term capital growth. (Also Read: Balancing Income And Expenses: How To Create A Monthly Budget And Stick To It )

Why is ELSS a preferred mode of investment?

Investors have the flexibility to invest in ELSS mutual funds either through systematic investment plan (SIP) or by making lump sum investments. Capital appreciation potential, low lock-in period, as well as tax benefits have made ELSS mutual funds one of the preferred tax-saving investment options in recent times.
ELSS funds are also considered to be sustainable as people can plan for their futures while saving on taxes. It offers dual benefits of tax deductions and wealth creation over time.
As compared to other tax-saving instruments such as fixed deposits (FD) or public provident funds (PPF), ELSS mutual funds stand out as its returns are generally higher, especially when markets are bullish.

According to data shared by Groww, 15 per cent of investors in the age group of 25-40 invested in ELSS funds, and while they showed a slight preference for lumpsum investments (41 per cent), a sizable percentage also chose to invest in ELSS through the SIP route (38 per cent).On the contrary, 54 per cent of investors above the age of 40 chose lump sum as their preferred mode to invest in ELSS.

“While lump sum is the preferred mode to invest, investors are also opting for the SIP route to invest in ELSS funds especially in the 25-40 years age group. It is important to note that ELSS is like any other equity fund and investing periodically helps one cultivate financial discipline and reap benefits of rupee cost averaging,'' said Harsh Jain, Co-founder, and COO, Groww.

Here's how you can invest in equity-linked savings scheme (ELSS) mutual funds:

People can invest in an equity-linked savings scheme, the same way they invest in mutual funds. Firstly, determine your tax slab and taxable income. Secondly, in order to undergo a proper KYC verification, make sure you have a recent photo, your PAN card with correct details, and a valid address proof.

Secondly, one can choose their preferred ELSS funds by comparing the consistency, returns, and past performance of a few of the top tax saving funds chosen by investors in recent months.

According to Groww, between the period of January 2020 till March 2021, the top tax saving funds chosen by investors are as follows:

Axis Long Term Equity Direct Plan Growth
Mirae Asset Tax Saver Fund Direct Growth
Aditya Birla Sun Life Tax Relief 96 Direct Growth
Canara Robeco Equity Tax Saver Direct Growth
Tata India Tax Savings Fund Direct Growth