Mutual Funds

Everything you need to know about ELSS Mutual Funds

Created on 05 Dec 2020

Wraps up in 4 Min

Read by 4.7k people

Updated on 12 Sep 2022

As a new investor in the market, it can become very hectic to find a long-term scheme that can generate wealth, give regular returns, with lower risk, and save taxes, all at the same time. There are various schemes in the market that offer regular returns; however, they are taxed accordingly.

To save that money from heavy tax, ELSS (Equity Linked Savings Scheme) steps into the market as a saviour of taxation on capital gains. This is why the ELSS fund scheme is also known as the tax-saving scheme.  

Let’s explore the ELSS fund scheme and understand what this scheme offers to its investors.

What are ELSS Mutual Funds?

As the name suggests, the ELSS (Equity Linked Savings Scheme) is an open-ended mutual fund in which the fund manager invests the investors’ money in equity and instruments related to equity. 

ELSS funds are also known as tax-saving mutual funds as this mutual fund scheme offers tax benefits and can save taxes up to 1.5 lacs on capital gains under section 80C of the Income Tax Act. 

This mutual fund comes with a 3-year lock-in period. This means that if investors try to exit in the middle of the lock-in period, they will have to pay a heavy expense ratio

Despite their short lock-in period, ELSS mutual funds have historically given considerably higher returns compared to NSC, PPF, VPF etc; which have longer lock-in periods.

Source: Clear Tax 

Characteristics of ELSS Mutual Funds

  • The fund manager invests 80% of the company’s assets in equity or instruments related to equity.
  • The fund manager invests the investor’s fund in a diversified manner (Various market capitalization, themes, and sectors) to avoid the risk. 
  • The minimum lock-in period is of 3 years.
  • Tax benefits to the investors under section 80C of the Income Tax Act.
  • Investors’ income is treated as LTCG (Long-Term Capital Gains), and tax benefits offer according to that.

Tax Benefits offered by ELSS Mutual Fund

As mentioned above, the ELSS mutual fund scheme offers tax benefits to its investors. Investors get a deduction in tax up to Rs 1.5 lakh under the section of 80C of the Income Tax Act. 

After the lock-in period of 3 years, if investors redeem their fund units, they will receive LTCG. These gains received by investors will not be taxable up to Rs 1 lakh in that financial year. 

If the capital gains exceed the limit of Rs 1 lakh, then 10% of the taxation on capital gains will be applied without indexation. 

By making the full utilisation of Section 80C provisions, you can save up to Rs 46,800 a year in taxes!

Benefits of Investing in the ELSS fund Scheme

ELSS fund schemes offer various benefits to their investors from tax deductions to higher returns. Let’s have a look at some of the benefits of investing in an ELSS fund scheme:

  • Higher Returns: This scheme mostly invests its funds in equity and instruments related to equity, which offers higher returns in a long-term investment. However, higher returns often come with higher risk. The ELSS fund scheme offers higher returns, and it has the lowest lock-in period compared to other tax savings schemes.
  • Diversification: Diversification is the key to avoiding the risks and losses in any investment. The ELSS fund scheme invests in equity and debt securities, wherein, investors can invest in large-cap, small-cap, and medium-cap equity funds to diversify their portfolios and avoid risks. 
  • Tax Benefits: The ELSS fund scheme offers tax deductions of up to 1.5 lakh on capital gains.
  • Systematic Investment Plan (SIP): This fund scheme also offers its investors to start with a minimum amount of Rs. 500 as a monthly SIP to ensure that they do not bear the burden of paying heavy monthly investments.
  • Professional Investment Management: In this fund scheme, investors do not need to worry about their investment portfolio as the fund houses hire a professional management team to research the market and invest accordingly.

Who Should Invest in ELSS Fund Scheme?

  • If an individual is looking for a scheme that can offer higher returns in the long run and save taxability on capital gains, then they should opt for this fund scheme.
  • This scheme is ideal for those investors who are looking to invest for a longer period as equity performs well in the long run, and this scheme has a minimum lock-in period of 3 years. 
  • This fund scheme is more volatile because the fund manager invests in equity. Hence, investors should invest according to their financial goals.

Best ELSS Fund to Invest in 2020

Here is the list of some ELSS funds that performed well in the past few years:

Fund Name

Returns (%)

1 Year

3 Year

5 Year

7 Year

10 Year

Mirae Asset Tax Saver






Axis Long Term Equity






Aditya Birla Sun Life Tax Relief 96






Invesco India Tax Plan






Kotak Tax Saver






DSP Tax Saver






ICICI Prudential Long-Term Equity






Motilal Oswal Long-Term Equity






Tata India Tax Saving






Nippon India Tax Saver






*Disclaimer - It is advisable to do your own research before making any investments. All Mutual Funds investments are subject to market risks. 

The Bottom Line

The ELSS fund scheme is an ideal choice for those investors who are looking to invest for a longer period to gain higher returns and wish to save the tax on their capital gains.

However, before investing in any fund scheme, it is important to look at all the possible choices and choose the best fund scheme that has the potential to fulfil your financial requirements.

Sometimes it becomes difficult to select the right fund because of the wide range of fund schemes available, but if the investor’s goals are clear, their final choice can become clearer.

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Divyanshu Kumar

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Divyanshu did his post-graduation in Financial Economics, and that's when he realized that writing about finance interests him the most. He has been writing finance content for two years and considers himself a coherent and confident writer. As a Finance content writer, he reads a lot about the subject and makes sure he is up to date with the latest updates in the market. Besides that, he is passionate about fitness and works hard to maintain a healthy lifestyle.

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