ELSS funds are diversified equity funds with a lock-in period of 3 years.
Offer tax deduction of up to 1.5 lakhs under Section 80C of the Income Tax Act, 1961.
Provide double benefit of tax saving and capital gains
Income tax benefit
Investments made in ELSS schemes are eligible for deduction from taxable income under Section 80C of the Income Tax Act.
Up to Rs 1.5 lakhs invested in ELSS funds in a year is eligible for deduction under Section 80C. No tax is levied when you redeem your investment after the lock-in period.
Since ELSS funds have more than 65% of their corpus invested in stocks, they enjoy the exemption from tax on long-term capital gains as is the case with any other equity fund. The dividend income is also tax-free.
Lower lock-in period
The lock-in period is only three years, the shortest among all tax-saving options under Section 80C. You cannot redeem or switch to another option during this period. In the case of SIPs, each installment is treated as a separate investment and will have a three-year lock-in period.
Tax-free Dividends/Capital Gains
Dividends declared under the ELSS scheme during the investment period are tax-free. The profits on the sale of ELSS units are treated as long-term capital gains, and are not subject to tax.
Higher return potential
ELSS funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.
Minimum Monthly Investment
Unlike regular equity schemes, the ELSS funds have a lower investment threshold of Rs 500. You can invest a large amount at one go, but the best way to invest in equity-oriented instruments is through regular monthly driblets called SIPs.
Growth, Dividend & Reinvestment
The dividend is only a profit-booking exercise since a fund's NAV reduces by the amount the investor receives as dividend. In the growth option, the amount remains invested for the entire tenure.
The dividend option provides a periodic income to the investor, though there is no obligation on the part of the mutual fund to declare a dividend or maintain its payout ratio year after year. The growth option has the potential to generate higher returns. Your choice should depend on your needs and risk appetite. Avoid the dividend reinvestment option because you will find it difficult to exit the fund completely. There will always be some units that have not completed the lock-in period.