What are ELSS funds?

In short:

  • ELSS funds are tax-saving mutual funds that invest in the stock market
  • You can save up to ₹1.5 lakh in taxes by investing in ELSS funds
  • ELSS funds have a lock-in period of 3 years
  • ELSS funds don’t give guaranteed returns
  • Returns earned from ELSS funds become tax-free after one year
  • ELSS funds investments can be done in one go or installments

At length:

ELSS funds are tax-saving mutual funds. They are mutual funds that invest in the stock market. You can save up to ₹1.5 lakh in taxes by investing in these tax-saving mutual funds under Section 80C. The amount that you invest in ELSS funds can be deducted from your annual income. You have to invest in ELSS funds before 31 March and submit the proof of your investment to your company’s HR department. This proof will also be required when you file income tax returns in June and July.

Your invested money stays locked-in in ELSS funds for 3 years. There is no way to redeem your investment before the lock-in period expires. But this is the lowest lock-in period among all tax-saving investments. Other tax-saving investments have longer lock-in periods.

Tax-saving investment options
Tax-saving investment Lock-in period Returns
ELSS funds 3 years 12% – 15% (not guaranteed)
Public Provident Fund (PPF) 15 years 8.1% (guaranteed)
National Pension System (NPS) Till retirement 8% – 10% (not guaranteed)
Tax-saving Fixed Deposits 5 years 6% – 8% (guaranteed)
National Savings Certificate (NSC) 5 years 8.1% (guaranteed)

ELSS funds don’t offer guaranteed returns. These funds invest in the stock markets and their returns depend on the performance of the stocks they invest in. This means that their returns may go up and down. But good ELSS funds have managed to earn higher returns than other tax-saving investments. Another advantage of ELSS funds is that if you hold the investment for more than one year, the returns become completely tax-free for you.

You can invest in ELSS funds in one go or through installments during the year. If you invest in installments through a systematic investment plan (SIP), you also have the flexibility to stop and start the SIP whenever you want.

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