Navigating the maze that is personal finance

Thursday, 2 February 2017

All that you want to know about Equity Linked Saving Schemes (ELSS)

What is it?
A mutual fund that provides you tax benefit under section 80C.
ELSS stands for equity linked saving schemes.

Maximum limit of investment
There is no upper limit on investments in ELSS. However, investments of only up to Rs.1.5 lakh per year are tax deductible. 

Lock in period
36 months or 3 years from date of contribution.

Tax on maturity
There is no tax on liquidation after 3 yrs.

Contribution mode
Contributions can be lump sum or through SIP (Systematic Investment Plan).
However each SIP is considered a separate investment and hence can be liquidated only after three years. The contribution can be stopped after making one time payment. It is however advisable to remain invested for a longer time than lock in of 3 years.

How is it different from other mutual funds?
Regular mutual funds do not provide tax benefit, ELSS does.
However a mutual fund can be liquidated after one year without attracting tax as against three year lock in for ELSS.

How is it different from other 80C instruments?
ELSS provides growth from equity market and provides tax break at the same time. This pushes the returns higher, however you should remain invested even after 3 years to maximise your return and should not change ELSS frequently. Since these are equity linked they are related to market risks. The other instruments like PPF generate fixed returns hence your risk appetite should decide what 80C instrument you should choose.

Types of ELSS
You can choose either dividend type of ELSS or growth type. The dividend received is tax free in the hands of receiver. In growth type your returns are reinvested and hence builds a bigger basket in the long run.

Best rated ELSS for 16-17

Fund 3 years returns (%) 5 years returns (%)
Axis Long Term Equity Fund 24.43 21.68
Birla Sun Life Tax Plan 23.53 18.86
Birla Sun Life Tax Relief 96 24.52 19.59
DSP BlackRock Tax Saver Fund 25.88 20.82
Franklin India Taxshield Fund 23.25 17.94

Source: Valueresearchonline

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