Photo: iStock
Photo: iStock

What is ELSS?

Other than deduction benefits and the lock-in, an ELSS is quite the same as a diversified equity fund

Although all equity funds exempt you from paying long-term capital gains tax of 10.4% up to an amount of 1 lakh (apart from grandfathering clause), there is one breed of equity funds that give you tax deduction benefits at the time of making an investment. These are equity-linked saving schemes (ELSS), more popularly known as tax-saving mutual fund (MF) schemes.

An ELSS gives you tax deduction benefit of up to 1.5 lakh under Section 80C. This is the only pure equity investment vehicle that offers Section 80C deduction benefits.

The only catch here is it comes with a 3-year lock-in. Other equity funds don’t carry a lock-in. Remember, the lock-in also applies to your systematic investment plans (SIP); every monthly instalment you make in an ELSS is subject to a 3-year lock-in.

Other than deduction benefits and the lock-in, an ELSS is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors and market capitalisations. When investing in ELSS, care should be taken to not invest in a new scheme every year to save taxes. One ELSS in the portfolio—in which you keep topping up every year—is more than enough.

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