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How to Save Tax By Investing in ELSS Mutual Funds

3 Mins 07 Feb 2023 0 COMMENT

Equities are the most-recommended investment tools if you want to accumulate wealth in the long run. Since only a few have the knowledge or expertise to analyse companies that provide good returns, investing in equity mutual funds can be a smart move to tackle this problem. What if we told you that, along with making equity investments, you could save taxes? That’s right! Through ELSS tax saving investments, you can invest in equities and save on tax.

What is ELSS? 

Equity-Linked Savings Scheme or ELSS tax-saving mutual fund is a type of investment instrument with tax-saving benefits. ELSS is an equity-oriented mutual fund that has at least 80% of its investments in equities. Investment in this category of open-ended funds is eligible for tax deductions under the Income Tax Act. 

In exchange for the tax deduction, you must stay invested in ELSS tax saving mutual funds for at least three years. Returns from ELSS tax saving funds are linked to market performance. 

There are two kinds of ELSS funds you can invest in: 

  • Growth Funds: ELSS growth option funds pay investors the full redemption amount as a lumpsum when you redeem it. This is useful for wealth creation.
  • Dividend Funds: ELSS dividend option funds pay you dividends routinely through your investment. You could choose to receive these dividends on payout or reinvest it for future returns. 

Understanding How to Save Tax With ELSS

Investments in ELSS tax saving mutual funds are eligible for tax deductions of up to Rs 1,50,000 under Section 80C of the Income Tax Act. If you choose to invest the whole Section 80C amount in ELSS, you can save up to Rs 46,800 in taxes, depending on your income tax slab. However, you have to stay invested for at least three years. 

If you receive dividends on your ELSS tax saving investment, the dividend income will be taxable according to your income tax slab. Additionally, a TDS of 10% will be deducted. You can claim this when you file your Income Tax Returns. 

When you redeem your ELSS tax saving mutual fund, you will incur long-term capital gains tax of 10% on profit if you make more than Rs 1,00,000 in profit from the sale of equity mutual funds. If the profit is less than Rs 1,00,000, no tax will be due. 

To enjoy maximum benefits of the ELSS tax saving fund, invest according to your financial goals. Market-linked returns on ELSS will help you make wealth in the long run, while investment today can help you save tax. The amount of tax that you save can be reinvested in other avenues to multiply your wealth even further. 

Why Invest in ELSS? 

Better Than Other Tax Savers 

Compared to other tax-saving instruments like Public Provident Funds or National Pension Scheme, ELSS investments provide higher ROI in the long run. The inflation-beating returns of ELSS investments can help with wealth generation plus tax savings. 

Shortest Lock-In Period 

Among all 80C investments, ELSS has the shortest lock-in period of three years. PPF has a lock-in period of 15 years; the NPS lock-in period is also 15 years, while Tax-Saving FDs also have a lock-in period of three years. 

Flexibility in Investments 

You can invest in ELSS tax saving funds in lump sum or through SIPs. You can plan your financial investment through a financial year through SIPs. 

Capital Appreciation 

You can choose to continue your ELSS investments over the years and multiply your capital. Moreover, you do not have to redeem your investment after three years. You can hold your investment for a longer period to enjoy its returns. 


Tax Planning With ELSS | ELSS Tax Benefit @ICICIdirectOfficial #RelaxforTax

Things to Keep in Mind Before Investing in ELSS 

Now that you know how to save tax with ELSS, here are some things to consider before you make ELSS investments: 

  • ELSS investments are riskier than PPF or FD investments because they invest in equities. However, the possible returns are also higher. 
  • You cannot withdraw an ELSS investment for at least three years. There is no option to pay a fine or penalty and withdraw before maturity. Therefore, only invest the amount you can afford to keep locked in for three years. 
  • If you choose to invest in ELSS through Systematic Investment Plans (SIPs), then every installment will have to remain locked in for three years, starting from the date of investment. 
  • Investments in ELSS are eligible for tax deductions up to Rs. 1,50,000. You may choose to invest an amount higher than this, but it will not be eligible for deduction. 


ELSS tax saving funds can be an excellent option to save taxes and generate wealth in the long run. Like other mutual funds, they provide market-linked returns. However, when investing in ELSS, be sure that these investments fit your financial needs. Even though they are tax-savers, they are also financial investments that need to be viewed from the point of your larger financial goals. 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.