Equity-Linked Savings Schemes (ELSS) remain among the most popular and effective tax-saving instruments available to retail investors in India. These offer a unique combination of tax benefits and long-term capital appreciation through equity exposure, making them a compelling option to balance tax planning with wealth creation. Under Section 80C of the Income Tax Act, investments of up to Rs 1.5 lakh made during the fiscal year in ELSS funds are entitled to tax deductions. This directly reduces the investor’s taxable income, offering tangible annual savings. For investors in the highest income tax slab of 30%, this deduction can result in potential tax savings of up to Rs 46,800. However, it is essential to note that these benefits are available only under the old tax regime. Taxpayers opting for the new regime, introduced with lower slab rates and fewer exemptions, cannot claim deductions under Section 80C, including those related to ELSS. However, ELSS schemes continue to attract investors owing to their equity-linked returns and relatively low lock-in periods – the shortest among all Section 80C-eligible instruments. Traditional investment options, such as Public Provident Fund (PPF) and National Savings Certificate (NSC), also offer security and fixed returns, but come with longer lock-in periods and lower returns.
Prior to investing, understanding the lock-in mechanism of ELSS funds is critical. For lumpsum investments, the three-year lock-in begins from the date of the transaction. For example, a one-time investment made on March 31, 2023, would become eligible for redemption on or after March 31, 2026. However, when investing through a SIP, each instalment is treated as a separate investment. Consequently, each monthly contribution carries its own three-year lock-in period, following the First-In-First-Out (FIFO) rule. While this might add complexity to redemption planning, SIPs help investors average out their purchase cost over time—with rupee-cost averaging—which reduces the impact of market volatility. Given that ELSS funds mainly invest in equities, returns are not guaranteed. They can move up based on economic cycles, regional trends, and broad market movements. However, historic data reveals that long-term investors, especially those with a five-year or greater investment horizon, have often earned greater returns than traditional fixed-income tax-saving instruments. This long-term investment horizon helps absorb short-term market fluctuations and increases the possibility of procuring attractive, inflation-adjusted gains.
ELSS funds offer investors the option to choose between growth and dividend payout modes. While the former option allows funds to accumulate and compound over a period of time, the dividend payout option enables investors to procure regular income during the lock-in period- an attractive feature for those who require partial liquidity, without redeeming the entire investment.
First published in HansIndia