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ELSS: How tax saving MF are best among tax saving options?

ELSS Mutual funds would help you to get tax benefit and also higher capital appreciation comparing to other tax saving options

December 10, 2015 / 07:13 PM IST
Suresh KP

It is December now and every one might be busy in checking various tax saving options. While there are various investment options available to save income tax under section 80C of Income Tax Act, Equity Linked Saving Scheme (ELSS), also known as Tax Saving Mutual funds score high comparing to other options.

What are ELSS Tax Saving Mutual funds?

ELSS invests 65% in equity related instruments that are notified to avail tax benefits. Investment in such ELSS tax saving mutual funds would provide tax benefit to investors u/s 80C, which is capped to a maximum of Rs 1.5 lakh per year. While you can invest more than this cap amount, you would not get any tax benefit above this limit.

Benefits of ELSS compared to other tax saving options:

1) Highest returns: ELSS mutual funds invests in shares and related instruments. And hence provide higher returns compared to other tax saving investment options. If you observe, PPF, NSC, Tax saver bank fixed deposits, would provide around 8% to 8.5% returns per annum. However on other hand ELSS can provide 10% to 15% annualized returns.
2) Lowest lock-in period of 3 years: Tax saving mutual funds come with lock-in period of three years. Other tax saving investment options like NSC has five years lock-in, PPF has 15 years lock-in period, Tax saver bank fixed deposits has five years lock-in.Hence ELSS scores high which has lowest lock-in period.
3) ELSS returns are tax free: Returns from ELSS funds are tax free. If you observe, none of the returns from tax saving investment options other than PPF are tax free. NSC, Tax saving bank fixed deposit, Tax saving post office time deposit scheme - all these tax saving options offer returns that are taxable based on individual tax slab. Interest in public provident fund is tax free, but that comes with a 15 year lock-in period (apart from partial withdrawal available after few years). Since ELSS mutual funds invest in equity related instruments, these are classified under equity funds. Any returns received from equity funds after one year is tax free. ELSS funds comes with a three years lock-in period, dividends/returns/capital gains from such funds are also tax free.

What are the risks associated with investing in ELSS?

Since these funds invest minimum 80% in equity, there is an element of risk. Moderate risk and high risk investors can consider this as a tax saving investment option. Also the past performance may not repeat in future. Hence investors should consider these factors before investing in such funds.

How to pick-up good ELSS mutual funds to invest now?

Based on these facts, one may want to to invest in ELSS funds. However, there might be still something running in your mind on how to pick-up a good ELSS to save tax. Here are few tips where you can choose a top and best fund to invest.
•Pick-up a scheme that is ranked higher by Crisil. You can consider Rank-1, Rank-2 and Rank-3 ELSS mutual funds
•Ignore funds which has low Assets Under Management (AUM).
•Consider top performing funds in last 5 years.

Here are some top rated ELSS which are filtered based on above parameters.

The author of this article is founder of He can be reached at for any clarifications.

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