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Equity Linked Savings Schemes(ELSS)

ELSS are commonly known as tax saving mutual funds and have got popularity in past few years.Qualifying as tax saving instruments, ELSS also bring you good returns in long run. ELSS are the tax saving schemes with the shortest lock in period (3 years)  compared to other tax savings options having lock in period of 5-15 years. ELSS Funds are invested in equities hence returns can be as high as 16-18%. However, due to investment in stock market returns are not guaranteed. ELSS are more popular with younger generation as they have long term horizon.

When & how much to Invest?
Investment in ELSS can be made with a small investment amount of Rs. 500. ELSS funds have provided investors with complete flexibility in deciding the amount of investment. One can also invest a large amount as a single investment. Small investors who can not invest in lump sum can invest monthly by choosing a monthly Systematic Investment Plan(SIPs) with just Rs. 500. There is no maximum limit but the deduction u/s 80C will be limited to Rs. 150000.

One should not invest a lumpsum in a single fund, instead diversify the investment. Choose a combination of two or three fund houses and also spread your investment on time basis. Start investing from the start of the year itself. Split the investment amount systematically over a period of time. Choosing SIPs is a good option but if you have missed on SIPs at the start of the year then distribute your investment over the remaining months of the financial year.


Returns from ELSS can be in the form of dividend; in case of dividend payout option and in form of long term capital gain; for growth & dividend reinvestment options. During last 5 years most of the ELSS have generated a yearly return of more than 15%. High returns also mean high risk. ELSS funds are dependent on stock market. This is the reason that ELSS are considered as high risk investments. There is no guarantee that investments will give positive returns after the lock in period of 3 years. Generally in longer period ( more than 5 years) ELSS has generated higher return than fixed income tax savings schemes like PPF, NSC etc.

Lock in period?
The lock in period of ELSS is 3 years which is the shortest among Tax Savings Schemes. 3 years lock in period does not mean that you have to redeem the fund after 3years. There is actually no maturity date of ELSS. You can continue holding the ELSS even after 3 years. Return in the form of Capital Gain is tax free whenever you redeem your investment. As funds under ELSS are invested in equities and equities perform better in long run, so keeping funds for 5 years or more can bring in higher returns.  
Lock in period of dividend reinvestment plans is calculated afresh for the dividend reinvested part from the date of dividend reinvestment, each reinvestment is treated as a fresh investment and a new lock in period starts for them.

Tax Benefits
Various Tax benefits of investing in ELSS are-
  • Investment in ELSS qualifies for deduction u/s 80C with in the limit of Rs. 150000 along with other tax saving investments.
  • Securities Transaction Tax(STT) @ .001% on the total redemption value is deducted by the fund house.
  • Dividend from ELSS is tax free.
  • No TDS is applicable on Dividend received or amount paid at the time of redemption.

Different Options
of ELSS investment
ELSS funds are available with three options-

Growth Option- ELSS(G)
Funds under growth option do not distribute gain in the form of regular dividend to investors/unit holders. All the gains/losses made on investments are added/reduced to the NAV of the fund. Thus if things go well NAV rises over the time. Under growth option the amount remains invested for the entire period till redemption. At the time of redemption the funds are redeemed at final NAV. The investor will realize long term gain/loss at the time of redemption.

Dividend Option- ELSS(D)
Under dividend options, funds distribute the income earned by them in the form of dividends to its investors/unit holders. Funds are not under any obligation to provide dividend. If no income is made by the fund ie. there are losses, no dividend is distributed. NAV of the fund reduces with the amount of dividend distributed to the investors/unit holders.

Dividend Reinvestment Option-
under this option dividend is not paid to investor/unit holder, instead it is reinvested. Means the dividend amount is used to invest in more units of the scheme. The negative part of this option is that your 3 year lock in period will never end as every reinvestment of dividend is treated as fresh investment and lock in period for that will be from the date of reinvestment. However there is no difference as far as value part is considered. One plus point is that every reinvestment will also qualify for tax saving deduction u/s 80C with in the limit of Rs. 150000. Still due to this never ending lock in period scenario of dividend reinvestment, you may end up with some of your funds (reinvested dividend) locked in ELSS.

How to exit from Dividend Reinvestment Option?
Many fund houses give you an option to switch to another option. Option of switching from diividend reinvestment to dividend payout is provided by many fund houses. In case of switching to growth option, fund houses may calculate lock in period from the date of change. Switching from one option to other will require some paper work to be done as per the requirements of the fund houses.

How to Select ELSS?

Selecting right fund is very important as returns vary significantly for different funds. There are some parametres which one must see while selecting an ELSS Fund. Read in detail about How to select which ELSS to invest in?

Other useful links:
What are Systematic Investment Plans-SIP?
Public Provident Fund(PPF)
National Savings Certificates(NSC)
Fixed Deposits(FDs) with Tax benefits
Some Tax Planning Tips
TDS of FD interest
Taxability of Savings Bank account Interest

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