Must read : Choosing ELSS for Section 80C Deduction


What is an ELSS fund? ELSS or Equity Linked Savings Scheme is an Equity Fund. An Equity Fund is a fund that invests more than 65% of its funds in Equities.  Since ELSS is an Equity fund it comes with both the risks and rewards of investing in equity.

Deduction under Section 80C? ELSS funds are eligible to be claimed as a deduction under section 80C. The total deduction under section 80C is Rs 1,50,000 and you can claim the entire amount by investing in ELSS. You can also invest more than Rs 1,50,000 in ELSS however deduction is allowed under Section 80C up to Rs 1,50,000.

Lock in period? This fund has a 3 year lock in period, which means you cannot sell the fund before end of 3 years from the date of your investment. This lock in is applicable to each of the tranches invested. Let’s say you purchased Rs 50,000 ELSS in December 2014 and another Rs 50,000 ELSS was purchased is February 2015. The ELSS fund purchased in December 2014 shall be in lock in period until December 2017 and the second purchase shall be in a lock in period until February 2018. Of course, the fund allows you to stay invested for a longer period if you wish to. Therefore ELSS has the edge of having good liquidity as compared to other traditional forms of investment for 80C like PPF and NSC.

Dividend Option or Growth Option? While investing in an ELSS fund, you can choose Dividend Option to receive dividend at regular intervals or you can choose the Growth Option, where the fund reinvests your returns in the same ELSS. While choosing dividend option helps you get timely return on your investment, if you are willing to take the risk you can go for the growth option.

Tax Free Dividend? In case you choose Dividend option, dividend received by you is tax free.

Does ELSS have an assured return? Possibly the only drawback of investing in ELSS is that it is an equity based investment and is prone to market risk. Choose your fund wisely by reviewing its performance over a period of time (over 3 years or more) and also find out about the performance of the fund house.

Should I invest in lump sum or can I spread the investments? For claiming tax deduction under Section 80C in financial yea r 2014-15, the amount invested in the period 1st April 2014 to 31st March 2015 is eligible. You can invest in ELSS via a SIP or a systematic investment plan. However do note that the 3 year lock shall be applicable to each of those SIPs investments individually.

Tax on Capital Gains after lock in period? Equity Funds are considered Long Term Capital Asset when held for more than 12months. Therefore, ELSS funds which can only be sold post the 3 year lock in period are Long Term Capital Assets. Long Term Capital Gains on sale of Equity Funds is not taxable. So you don’t have to pay any capital gains tax when you sell ELSS. Likewise Long Term Capital Loss on equity funds is a dead loss and cannot be set off against any other income.

How to Invest? You can invest in most of ELSS funds through your DEMAT account via an ECS or through cheque.

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