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ELSS is a popular mutual fund scheme that allows you to take exposure in the equity market, while simultaneously serving as a tax-saving product. It is a type of mutual fund which invests majority of its corpus in equity and equity related products.


• ELSS is an equity oriented tax saving investment instrument.

•  It is arguably the best tax saving instrument because of its potential to create wealth for investors in a long term scenario.

• ELSSs are open ended, that is, investors can subscribe to the fund any day.

• NAV (i.e. price) of the fund is declared on every business day.

• ELSS is especially suited for investors who are not averse to risk and want to put their money in stock market to earn high returns but do not have the expertise to manage their investments in stock market.


a) Growth: Income earned by the fund is not distributed to unit holders. Investors do not earn any dividend during the time they hold the fund. Any income/profit earned by the fund increased the NAV of the fund and vice versa. On sale of holdings, the investor will realize long-term capital gain/loss.

b) Dividend: The fund distributes the income earned by the fund to the investors as dividends. The dividend so received is tax-free in the hands of investors.

c) Dividend Re-investment: The dividends declared by the funds are re-invested. The investor can claim tax deductions to the tune of dividend reinvested. For example an investor is holding 10000 units of a fund and the fund declares a dividend of Rs.2 per unit, the total dividend of Rs.20000 (10000*2) will be reinvested on behalf of the investor as a fresh purchase.


• Over long term ELSS funds are the best tax saving instruments, if you are not averse to high risk.

• It offers a twin advantage of capital appreciation and tax benefits.

• It falls in the EEE (i.e. Exempt-Exempt-Exempt) category of investment instruments. That is, an investor enjoys tax exemption at all three stages of an ELSS namely, investment, earnings and withdrawal.

• Investments in ELSS qualify for deductions under Section 80C of the Income Tax Act subject to a maximum of Rs.150000/- in a financial year.

• Investors can opt for dividend option and generate earnings during the lock-in period.

• Any dividend earned by the investor is tax free in his/her hand.

• Long-term capital gains on sale/redemption of units are also tax free.

• ELSS has the lowest lock-in period of 3 years amongst all the tax saving instruments (In comparison PPF has a lock in of 15 years, NSC 6 years and Bank FDs 5 years).

• It beats all other tax saving instruments in terms of returns. PPF and NSC have a fixed rate of return in the range of 8-9 percent whereas return in ELSS can be anywhere between 15-25 percent over a period of time. 

• There is no ceiling for investments in ELSS.


• Not suitable for risk-averse investors because the risk factor is high as the funds are invested in stock market.

• Premature withdrawal is not allowed.

• If one is investing through SIP, each SIP installment is treated as a separate investment and the installment must complete three years of holding for it to be redeemed.


• Investors have the option to invest small amounts (minimum of Rs.500/-) on a monthly basis over a period of time through Systematic Investment Plan (SIP).

• SIPs are best suited for small investors who cannot invest a lump sum amount.

• SIPs have the benefit of averaging out the cost of investors. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out the cost of investors.

• They also help in availing benefits of compounding.

• SIPs inculcate a habit of discipline and regular savings.

• Withdrawing  SIP investments when the markets are falling is not advisable at all, as it would defeat the very purpose of investing through SIPs.

PS: Whenever you are investing in ELSS it is advisable that you take the SIP route and that too for a long term and do not think of redeeming it even after three years. 


Published by

CA. Ankit Chandrakar
Category Income Tax   Report

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