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Business News/ Markets / Explainer | What is ELSS and how does it work

Explainer | What is ELSS and how does it work

An Equity Linked Savings Scheme (ELSS) is a mutual fund that permits an individual to claim income tax deduction. At the time of investing in ELSS one can enjoy several benefits and the appended feature of tax exemption. Let's take a closer look at this

An ELSS is a mutual fund that invests a greater majority of its corpus in equity and equity-linked financial securities.Premium
An ELSS is a mutual fund that invests a greater majority of its corpus in equity and equity-linked financial securities.

Numerous investment options are available in the market these days. Investors scan for opportunities that offer high returns at low cost. ELSS is such an investment vehicle that extends both these features and paves the way for a smooth investment journey.

What does ELSS mean?

An Equity Linked Saving Scheme (ELSS) is a mutual fund that invests a greater majority of its corpus in equity and equity-linked financial securities. Equity-linked service schemes are the only mutual fund schemes that are eligible for tax deductions under section 80C of the Income Tax Act. Investors enjoy tax exemption in these schemes at the time of investing. Hence, these are also known as tax-saving funds.

How do ELSS funds work?

An ELSS fund is a body that invests in ELSS. It invests the majority of its principal amount in equity-linked instruments such as shares. The rest of the corpus that is not invested in equities is invested in other fixed-income or money-market securities. The returns that investors enjoy are due to capital appreciation.

In simple terms, if the market value of the stocks in which the fund has invested increases, the investors enjoy positive returns. Alternatively, if the value of assets falls, the investors face loss.

ELSS funds invest in diverse securities across various sectors and in companies with different market capitalizations.

READ MORE: How to invest in an ELSS?

Features of ELSS

Equity investment: At least 80 percent of the corpus of an ELSS fund is invested in equity and equity-oriented securities.

Lock-in period: These schemes have a minimum lock-in period of three years after which investors can choose to either reinvest or exit the scheme by selling securities. The three-year lock-in period is one of the lowest lock-in periods when compared to traditional investments.

Low capital requirement: The minimum threshold for investment is just Rs 500. This means that one can start investing in an ELSS fund with a sum as low as Rs 500.

Lump-sum vs SIP: One can invest in an ELSS in a lump sum or regular installments through a SIP. When one invests through installments, each installment will mature after 3 years from the date it is made. This implies that the last installment will be locked in for 3 years from its investment date which would be different from the maturity of the first installment (first in, first out policy).

Tax: ELSS is best known for its tax benefits. Invested in ELSS up to Rs 1.5 lakh is exempted from tax and doesn’t have to be added to one’s taxable income. In addition, the returns from the investment at the end of the investment period taxed Long Term Capital Gain (LTCG) provision, meaning the returns up to Rs 1 lakh are exempted from tax and the amount exceeding this limit is taxed at 10%.

ELSS offers many benefits and has the appended feature of tax exemption. If you decide to invest in an ELSS, it is vital to research and learn about the risks involved with each scheme. As there is no upper limit on the tenure of investment, you can also choose to continue investing in a scheme if it is profitable for you.

Saving tax through ELSS Funds
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Saving tax through ELSS Funds

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Published: 06 Jun 2022, 05:00 PM IST
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