While discussing numerous tax benefits and tax incentives available to taxpayers under the Income Tax rules, the Section 80C deduction is one of the most regularly used tax benefits. It allows taxpayers to deduct up to Rs. 1.50 lakh from their taxable income for certain eligible payments and investment alternatives. This section includes contributions to the Public Provident Fund (PPF), Statutory Provident Fund (SPF), payment of Life Insurance Premiums, home loan repayment, and 5-year tax-saver fixed deposits, among others.





ELSS (Equity Linked Savings Scheme) is another suitable investment option under Section 80C, as it invests at least 80% of its net assets in stocks and equity-related investments and has a three-year lock-in period for investors. With this tax saver mutual fund, investors can profit from the underlying potential of wealth building and enjoy market-linked returns by investing primarily in stock and equity-related investments.



The Benefits of ELSS Funds

As evidenced by the biggest number of investor folios across all mutual fund categories, ELSS is one of the most popular investment categories for mutual fund investors. The following are the inherent benefits of ELSS investments



Tax Deductions

An investor can claim a tax deduction for the amount actually invested, up to a maximum of Rs. 1.50 lakh under Section 80C for all qualified payments/investments under the provision combined. ELSS can be purchased by lumpsum or through a Systematic Investment Plan (SIP). SIP Investing in ELSS allows investors to spread their tax-saving investments throughout the year, alleviating the investment pressure for tax-saving investments in the final few months. Furthermore, investors should be aware that receiving a tax benefit is not a need for investing in ELSS funds and that one can invest in ELSS mutual funds even if a tax benefit is not necessary.

Lock-In Period

ELSS have a three-year lock-in period, which is the shortest of any qualified investment choice. The lock-in period applies to ELSS mutual funds investments from the date of investment, and ELSS investments cannot be liquidated before the three-year period expires.

Returns that are tax-efficient

According to tax legislation, capital gains from mutual fund investments are taxed at the time of redemption. As a result, the taxpayer must pay tax only after the earnings are recognised. This makes mutual funds more appealing than other eligible traditional investment channels under Section 80C, where interest income is normally taxed on an accrual basis.

Since the funds have a three-year lock-in period, ELSS fund gains are classed as Long-Term Capital Gains (LTCG). Long-term capital gains on ELSS funds are taxed at 10%. (plus cess and surcharge). While indexation benefits are not allowed for computing LTCG on equity funds, the taxable gain on ELSS mutual funds can be determined by subtracting the redemption value from the cost of units redeemed. Furthermore, there is no tax on LTCG of Rs. 1 lakh per year on equity shares and equity funds, including ELSS.

Market-linked returns

ELSS investments can provide investors with market-linked returns. According to SEBI guidelines, such funds must invest at least 80% of their assets in equity securities. Via their ELSS investments, investors gain the opportunity for higher returns. This bodes well for investors who are thinking about incorporating ELSS investments into their financial planning and investing in ELSS funds with long-term goals in mind.

How does the three-year lock-in period work?

Here's how the three-year lock-in works for ELSS funds:

  • Lowest Lock-in Period - Of all the permissible investment options under Section 80C, ELSS mutual funds have the shortest lock-in period, which is 3 years. When compared to all other qualifying tax-saving products, this means that investors will be prevented from selling their interests for the shortest length of time.
  • Liquidation Restriction - During the lock-in period, there is a restriction on the liquidation of investments placed in ELSS funds. This indicates that the ELSS units cannot be liquidated before the three-year holding term from the date of investment is completed.
  • Pledge not permitted during Lock-in Period - A three-year lock-in period applies not only to mutual fund unit redemption but also to unit pledging. As a result, loans secured by such ELSS units cannot be obtained during the lock-in period.
  • SIP Investment Lock-in Period - In SIP investing, the lock-in term of three years is computed separately for each investment rather than from the date of SIP registration. As a result, each SIP installment is treated as a distinct lump sum investment for the purposes of the lock-in period.
  • Lock-in Period is not contingent on availing Tax Benefit- The lock-in period of three years is inherent in the ELSS category of mutual funds, regardless of whether the investor has received tax benefits for such investments. This type of lock-in term assists investors in resisting the desire to redeem their investments during a market downturn, which is unproductive.
  • No Automatic Redemption on Expiry of Lock-in Period – Unlike most qualifying investment options under Section 80C, which are immediately liquidated at the end of the stipulated tenor, there is no automatic redemption on the expiration of the three-year lock-in period. As a result, ELSS fund investors have the option to continue investing in ELSS funds even after the lock-in period has expired. To liquidate their assets in ELSS funds, investors must submit a special redemption request.

With the shortest lock-in duration of three years among all qualified investment options, as well as the benefits outlined above, investors should consider investing your money in ELSS mutual funds for financial goals that are longer than three years. Investing for a longer length of time may help investors build wealth and achieve financial goals.

Disclaimer: Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.