Saving Mantra Blogs

How to Invest in ELSS and Understand the Income Tax Benefits

Written by

Financial Analyst

in

INTRODUCTION:

Equity Linked Savings Scheme (ELSS) has become one of the most preferred tax-saving investment options in India. It not only provides tax deductions under Section 80C but also offers long-term wealth creation through equity markets. With the shortest lock-in period among all tax-saving instruments, ELSS stands out for investors who want both tax efficiency and high-growth potential.

In this guide, we’ll explore what ELSS is, how to invest in it, and how you can maximize its income tax benefits.

🔍 What Is ELSS?

ELSS (Equity Linked Savings Scheme) is a type of equity mutual fund that invests primarily in:

  • Large-cap stocks
  • Mid-cap stocks
  • Small-cap stocks
  • Multi-cap portfolios

It comes with:

  • A 3-year lock-in period
  • Chance of higher returns compared to traditional tax-saving options
  • Eligibility for Section 80C tax benefit up to ₹1.5 lakh

ELSS is ideal for long-term wealth creation and tax-saving.

📘 How to Invest in ELSS – Step-by-Step Guide

1. Set Your Financial Goal

ELSS works best for:

  • Wealth creation
  • Retirement planning
  • Long-term savings
  • Tax planning under Section 80C

Since it’s equity-driven, it suits investors who can stay invested for at least 5–7 years.

2. Choose Between Lump Sum or SIP

You can invest in ELSS in two ways:

✔ SIP (Systematic Investment Plan)

  • Invest monthly (e.g., ₹2,000–₹5,000)
  • Minimizes market risk
  • Suitable for salaried individuals

✔ Lump Sum

  • Invest one-time (e.g., ₹50,000–₹1,50,000)
  • Best when markets are low

SIP is the most popular choice because it averages out market volatility.

3. Select the Right ELSS Fund

Compare funds based on:

  • 5-year and 10-year performance
  • Fund manager experience
  • Expense ratio
  • Portfolio diversification
  • Consistency across market cycles

Some ELSS funds have outperformed traditional instruments like PPF or NSC over the long term.

4. Complete KYC

KYC documents required:

  • PAN
  • Aadhaar
  • Bank details
  • Address proof

You can complete e-KYC with any mutual fund platform.

5. Use Trusted Investment Platforms

You can invest via:

  • AMC websites (HDFC, ICICI, Nippon, SBI etc.)
  • Mutual fund apps (Groww, Zerodha Coin, ET Money)
  • Banks or financial advisors

6. Track Your Investment Periodically

Even though ELSS has a 3-year lock-in:

  • It is recommended to stay invested for 5+ years
  • Long-term equity growth yields better results
  • Review performance annually

🧾 Income Tax Benefits of ELSS

ELSS is one of the most tax-efficient equity investment options in India.

1. Section 80C Tax Deduction

ELSS investments qualify for tax deduction under Section 80C.

You can claim:
👉 Up to ₹1.5 lakh reduction in taxable income per financial year

This is the same section used for:

  • PPF
  • EPF
  • NSC
  • Life insurance
  • Home loan principal repayment

But ELSS has the shortest lock-in of all tax-saving options.

2. Taxation on ELSS Returns

Since ELSS is an equity fund:

✔ Long-Term Capital Gains (LTCG) Tax

  • Maturity proceeds after 3 years are taxed at 10%
  • Only on gains exceeding ₹1 lakh per financial year

Example:
If your gain is ₹1.8 lakh → LTCG tax applies on ₹80,000.

✔ No tax during lock-in

You only pay tax when you redeem.

3. Dividend Taxation

If you choose the Dividend Option:

  • Dividends are taxable at your slab rate
  • Most investors prefer Growth Option for long-term wealth

🎯 Who Should Invest in ELSS?

ELSS is suitable for:

  • Salaried employees saving tax every year
  • Young investors starting their investment journey
  • Anyone with long-term financial goals
  • Investors seeking high-growth, tax-efficient options

If you are comfortable with equity market fluctuations and want high long-term returns, ELSS is ideal for you.

📌 Key Advantages of ELSS

  • Highest return potential among 80C investments
  • Only 3-year lock-in (shortest under 80C)
  • Flexibility to invest via SIP
  • Professional fund management
  • Long-term wealth creation
  • Efficient tax planning

🏆 Conclusion

ELSS is one of the smartest ways to save tax and simultaneously grow your wealth. With a short lock-in period, strong return potential, and dual benefits of equity growth and tax savings, it stands out from other traditional instruments. If you’re building a long-term portfolio or planning tax-saving for this financial year, ELSS deserves a top spot in your investment strategy.

By investing regularly through SIPs and staying invested for at least 5–7 years, you can maximize both returns and tax efficiency.

More posts