What is ELSS Mutual Funds? A Detailed Overview

What is an ELSS Mutual Fund?

ELSS is short for Equity Linked Savings Scheme. 

Mutual funds under this category invest a major portion of the pooled funds into equity or equity-related instruments. ELSS mutual funds are also popular as tax-saving schemes as they provide investors with a tax exemption of up to INR 1.5 lakh from their annual taxable income under Section 80C of the Income Tax Act.

How Does an ELSS Mutual Fund Work?

ELSS mutual funds provide you with a diverse portfolio. They are equity funds and primarily invest in publicly traded firms’ stocks. 

These funds seek to optimise long-term wealth appreciation and tax benefits. The stocks under the ELSS scheme come from a range of market capitalisations — large, mid, and small companies. These stocks are selected by fund managers after performing intensive market research to achieve the best risk-adjusted portfolio returns. 

ELSS fund investments are tax deductible under Section 80C of the Income Tax Act, 1961 — you can get a deduction of up to INR 1.5 lakh.  

It’s important to note that these equity-oriented schemes come with a mandatory lock-in period of 3 years. 

Furthermore, the income under this scheme after the 3-year tenure is considered LTCG (Long Term Capital Gain). These returns are taxed at 10% if your annual returns are above INR 1 lakh. 

Features and Benefits of ELSS Mutual Funds

Check out the key benefits of ELSS mutual funds —

• Brief lock-in Period: Compared to other tax-saving products like PPF (15 years lock-in period), ELSS funds have a shorter lock-in period of only 3 years. These funds provide you the option of withdrawing funds earlier in case of any financial emergency. With that said, it’s worth mentioning that the 3-year period can be a bit long for some investors as well. For them, regular mutual funds can also work.
• Inflation-beating Returns: ELSS mutual funds mainly invest in the stock market. This gives them the potential for higher yields compared to other traditional tax-saving options. 
• Tax Saving: Although not relevant for the UAE, this becomes quite useful if you invest in India. 

Through ELSS funds, you can save considerable tax under Section 80C on investments — up to INR 1.5 lakh every year. Moreover, LTCG or long-term capital gains up to INR 1 lakh are exempt from tax as well. 

However, keep in mind that if the returns exceed this limit, you’re liable to pay an LTCG tax of 10% on your returns. 

Best ELSS Mutual Funds

Here is a list of the best ELSS mutual funds along with their average annual returns —

Can NRI Invest in ELSS Mutual Funds?

Yes, Non-Resident Indians (NRIs) can invest in ELSS mutual funds. 

While taxes are not there in the UAE, they can certainly diminish your profits if your significant investment is in India. By investing in these funds, you, as an NRI, can grow your wealth and enjoy tax benefits for your income in India. 

Important Rules for Investing in ELSS Mutual Funds for NRI

• As per the Foreign Exchange Management Act (FEMA), you’re classified as an NRI if you stay in India for less than 120 days in a financial year.
• The 120-day rule applies if your total income in a financial year is more than INR 15 lakhs. For income below this figure, the limit changes to 181 days.

How Can NRI Invest in ELSS Mutual Funds?

As an NRI, here’s how you can easily invest in ELSS mutual funds — 

• Mutual fund asset management companies in India cannot get investments in foreign currency. As a result, you will first need to open an NRE or NRO account.
• Choose whether you want to invest by yourself or via Power of Attorney (PoA). 
• Initiate the KYC as per your selected mode. 

You can then start investing in the best ELSS mutual funds once all these procedures are completed.

Note: Just like other mutual funds, ELSS funds allow you to invest in a lump sum or through regular SIPs.

Who Should Invest in ELSS Mutual Funds?

You should invest in ELSS mutual funds if — 

• You are an NRI with major investments in India
• You are new to the world of investments 
• You want good returns along with tax benefits 

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