Most taxpayers postpone their tax planning till the last moment when they receive reminders to provide details of their tax-saving investments. Often, they end up investing in the usual tax-saving options or copying their peers because of a lack of time and awareness. It is the beginning of the financial year, which is the ideal time for planning your tax-saving investments because you get the benefit of compounding when you invest at the right time. So, with the right investment at the right time, you can maximize wealth and tax-saving. One such investment option is the ELSS tax saving fund. Let us discuss in detail what is ELSS and how it helps in tax-saving.
What is ELSS?
ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund that invests your money in the stock market to generate wealth and save tax. It is also known as the ELSS tax saving fund because it offers ELSS tax saving benefits under section 80 C of the Income Tax Act 1961. An ELSS scheme allocates around 65-80% of its equity and equity-related instruments corpus. The rest of the corpus is allocated to debt and money market instruments. Now that you know what is ELSS, let us tell you about how you can get ELSS tax benefits and more.
Features of ELSS Tax Saving Fund
- An ELSS fund has a diversified equity portfolio with investments across market capitalization and sectors
- Income from an ELSS investment is treated as a long-term capital gain.
- It has a short lock-in period of 3 years. Compared to other tax-saver schemes which have a minimum lock-in period of 5 years, ELSS has the shortest lock-in duration.
- There is no limit on the tenure of investment. You can invest for as long as you desire.
- ELSS offers the twin benefit of tax saving and inflation-beating returns.
- ELSS tax saving fund stands out compared to other tax-saving instruments like FDs, PPFs, etc. in terms of returns. It generates higher returns especially when the stock market is bullish.
How to Invest in an ELSS Tax saving Fund?
Investment in an ELSS can be done in two ways to ensure that you are making ELSS tax saving-
- SIP – A Systematic Investment Plan or SIP allows you to invest small amounts regularly. The frequency of these investments can be weekly, monthly, or quarterly as per your convenience. A SIP investment lets you take advantage of different market cycles. For instance, you can buy more units when the market is low or buy fewer units when it is performing high. This way the purchase price is averaged out in the long run. It also gives you the flexibility of investment according to the availability of funds.
- Lump-Sum – A lump sum investment is advisable only if you have a long investment horizon and a higher risk appetite. It does not give you the opportunity to take advantage of different market cycles therefore you need to stay invested for a longer period to receive the desired returns. Now let’s learn about the best ELSS mutual fund to invest in 2023.
Best ELSS Mutual Fund to Invest in 2023
Following is a list of the best ELSS mutual funds to invest in 2023
- Axis Long Term Equity Fund
It is an open-ended diversified ELSS fund that invests in a mix of large caps and selected mid-caps. The scheme offers a return of 14.6% for a period of 5 years. It is ideal for investors with a long-term investment horizon and a high-risk appetite.
- Canara Robeco Equity Tax saver Fund
It is a diversified ELSS fund that invests in a mix of large caps, select mid-caps, and small caps. The scheme offers a return of 16.89% for a period of 5 years. It is ideal for long-term capital appreciation.
- Mirae Asset Tax Saver Fund
It is an open-ended diversified ELSS fund that invests in strong growth companies. The scheme offers a return of 18.25% for an investment of 5 years. It is ideal for investors with a 3-5 years investment horizon and a moderately high-risk appetite.
- DSP Tax Saver Fund
It is an ELSS fund that invests in a mix of large caps, select mid-caps, and small caps. It is ideal for investors with a very high-risk appetite and long-term investment horizon. The scheme offers a return of 14.45% for an investment of 5 years.
Comparison Chart
| Fund Name | Axis Long Term Equity Fund | Canara Robeco Equity Tax saver Fund | Mirae Asset Tax Saver Fund | DSP Tax Saver Fund |
| Fund Age | 9 yrs 3 m | 9 yrs 3 m | 6 yrs 5 m | 9 yrs 3 m |
| Fund Size | ₹ 32,053 Crs | ₹ 3,586 Crs | ₹ 11,790 Crs | ₹ 9,872 Crs |
| Returns(5 yrs) | 14.6% | 16.89% | 18.25% | 14.45% |
| Top 3 Sectors | Financial (33.53%)Services (15.39%)Technology (12.63%) | Financial (27.25%)Technology (14.68%)Healthcare (6.37%) | Financial (30.71%)Technology (13.46%)Energy (10.41%) | Financial (33.64%)Technology (11.72%)Energy (7.68%) |
| Expense Ratio | 0.77% | 0.69% | 0.59% | 0.8% |
Why are ELSS Mutual Funds the Best Tax-Saving Option?
The principal invested in an ELSS scheme qualifies for tax benefits. Investment up to Rs. 1,50,000 in a year is eligible for ELSS tax saving exemption under section 80 C of the Income Tax Act, 1961. However, you can invest any amount you want in an ELSS fund and can save up to Rs. 46,800.
ELSS funds also offer a tax exemption on long-term capital gains up to Rs. 1,00,000. A tax of 10% is charged on long-term capital gain above the limit of 1 lakh. The dividend received by the investor is also tax-free.
Key Takeaways
- ELSS tax saving funds benefit wealth creation in addition to tax saving.
- ELSS mutual fund tax benefit limit is up to Rs. 1.5 lakhs per year under section 80 C of the IT Act.
- Comparison of best ELSS funds to invest in 2023.
Conclusion
Now that you are aware of what is ELSS tax saving, you can make sound investment. ELSS is undoubtedly one of the best tax-saving investment options you must have in your portfolio. It gives higher returns that beat inflation over the long term. However, higher returns come with higher risks. As these schemes mostly invest in equities, they involve high risks; therefore, returns are not guaranteed. If you are an investor with a long investment goal and an appetite for moderate to high risk, the ELSS tax saving fund is the best option for creating wealth in addition to saving taxes.
FAQs
To invest in an ELSS you will need your KYC verified. After verification, you need to shortlist a scheme, go to AMC’s website, select the scheme, investment option, and investment mode, and click Invest Now.
ELSS performance can be judged through certain parameters such as returns, expanse ratio, and various financial ratios. A good scheme will have consistent returns over a long period of time and is not much influenced by market disturbances.
There is no limit to investing in ELSS. However, you should first utilize the tax benefit limit of 1.5 lakh per year. If you have a long-term goal and are ok with your investment locked in for 3 years, you can make further investments.
ELSS is a mutual fund with tax benefits.
You can redeem ELSS units after the lock-in period in two ways: either you can choose a lumpsum withdrawal or you can choose a Systematic Withdrawal Plan over regular intervals.
ELSS funds majorly invest in the equity markets since the returns are guaranteed through them.
The investment made under ELSS gets tax-benefits under Income Tax Act Section 80C. Though there’s no upper limit, investments up to Rs. 1.5 Lakhs is eligible for deduction.
