ELSS, also known as Equity-Linked Savings Scheme are tax saving mutual funds that invest at least 80% of their corpus in equities and equity-related instruments. Mutual fund investments in these tax saver mutual funds are subject to tax benefits of up to Rs1.5 lakh under section 80C of the IT Act, 1961. These funds are accompanied by a 3 year lock-in period. Although ELSS funds are widely known as mutual fund tax savers, these funds are a class apart. Here’s why:
ELSS vs Other 80C investments
| Basis of comparision | ELSS | ULIP | PPF | EPF | LIFE INSURANCE |
| Definition | ELSS is a tax-saving mutual fund where investments are made in equity or equity-related securities. | ULIP is an investment plus insurance product where a part of the investment is used for securing the investor’s life, while the other part is invested in preferred financial products. | A PPF is a savings scheme offered by the government of India wherein the government pays the interest. This is considered as the safest tax-saving investment option offered to investors. | EPF acts as a saving tool for the employees. The employee as well the employer contributes an equal amount towards savings that can be redeemed upon retirement. | Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment to the named beneficiaries upon the death of the insured. |
| Expected returns | 15-18% | 8%-8.5% | 8-9% | 6-8% | |
| Tax benefits | Tax deduction of up to Rs1.5-lakh per annum under Section 80C. LTCG gains taxes at 10% above Rs1 Lakh without the indexation benefit. | The invested amount offers tax deduction of up to Rs1.5 Lakhs u/s 80C. However, the gains are taxable. | Money deposited in a PPF account u/s 80C can receive benefits up to Rs1.5 lakh. Interest gained is tax-free. | Invested amount offers tax benefits up to Rs1.5 Lakhs under Section 80C | The invested amount offers tax deduction u/s 80C and 10(10D) |
| Liquidity | High-liquidity at all times after the lock-in period. | Funds can be available after the lock-in tenure subject to further policy conditions. | Low or partial withdrawals after the expiry of 7 years from the account opening year. | An investor can withdraw 75% of their EPF corpus if they have been unemployed for more than 1 month. | It has a low liquidity ratio |
| Lock-in period | 3 years | 5 years | 15 years | Only an investor with an income of Rs15000 pm or less is mandated to contribute in EPF | 5 years |
| Minimum investment amount | Rs500 | ₹1,00,000 (for plans 45 years and below) | Rs500 | 12% of wages | No minimum amount |
Remember to check tax on mutual funds, as they can significantly hamper your returns. So, if it’s tax planning that you are looking for, you should consider investing in ELSS mutual funds, as these mutual funds have the potential to deliver significantly higher returns than other Section 80C investments. Happy investing!
