Best Tax Saving ELSS Mutual Funds in India

Last Updated on Jul 30, 2024 by Anjali Chourasiya

Investors who have knowledge related to mutual funds and their benefits keep looking for investment opportunities that can help them generate wealth, get regular payouts, and save taxes. Although numerous investment schemes are available in the market, most of them offer returns that are taxed according to the rules given by the Income Tax Department. This is where ELSS (Equity Linked Savings Scheme) funds come into the picture. These tax saving mutual funds offer tax returns under Section 80C of the Income Tax Act, 1961. Before diving into the information on the best tax-saving mutual funds, let’s read about ELSS and how it works.

What are ELSS funds?

ELSS funds are one of the best tax-saving mutual funds that invest the major portion of the corpus in equity and/or related instruments. ELSS funds are also called tax-saving schemes as they offer tax exemption of up to Rs. 1,50,000 from your annual taxable income under Section 80C of the Income Tax Act. 

An ELSS fund can be considered as an equity-oriented scheme with a necessary lock-in period of three years. It allows an individual or a Hindu Undivided Family (HUF) to deduct the total income by up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Therefore, if you want to invest Rs. 50,000 in an ELSS, this amount would be reduced from your total taxable income, thereby lessening your tax burden.

These schemes have a mandatory three year lock-in period from the date of their unit allotment. As soon as the lock-in period ends, the units automatically become free to be redeemed or switched. Moreover, the income you earn through this scheme at the end of the three years is considered a long-term capital gain; it is taxed at a rate of 10% if the amount is over Rs. 1 lakh.

Investors who have knowledge related to mutual funds and their benefits keep looking for investment opportunities that can help them generate wealth, get regular payouts, and save taxes. Although numerous investment schemes are available in the market, most of them offer returns that are taxed according to the rules given by the Income Tax Department. This is where ELSS (Equity Linked Savings Scheme) funds come into the picture. These tax saving mutual funds offer tax returns under Section 80C of the Income Tax Act, 1961. Before diving into the information on the best tax-saving mutual funds, let’s read about ELSS and how it works.

Top ELSS Funds based on 3-yr CAGR

Note: The list of top 10 ELSS mutual funds is curated using Tickertape Mutual Fund Screener on the date 27th September 2023 by using following parameters – 

• Category: Equity > Equity Linked Saving Schemes
• Plan: Growth
• 3-yr CAGR: Sorted from highest to lowest
• 5-yr CAGR

Top ELSS Funds based on volatility

Note: The list of top 10 ELSS mutual funds is curated using Tickertape Mutual Fund Screener on the date 27th September 2023 by using following parameters – 

• Category: Equity > Equity Linked Saving Schemes
• Plan: Growth
• Volatility – Sorted from highest to lowest 
• Tracking Error

Top ELSS Funds based on 1-yr absolute returns

Note: The list of top 10 ELSS mutual funds is curated using Tickertape Mutual Fund Screener on the date 27th September 2023 by using following parameters – 

• Category: Equity > Equity Linked Saving Schemes
• Plan: Growth
• 1-yr Absolute Returns – Sorted from highest to lowest
• Alpha

Features of ELSS funds

Let us examine the key features of ELSS funds:

• ELSS funds invest an enormous proportion of their portfolio in equity. A minimum of 80% of the aggregate investible corpus is invested in equity and instruments associated with it. The ELSS funds invest in equity in a varied manner across numerous market topics, capitalizations, and sectors.
• There is no primary tenure of investment, but there is a lock-in period of three years.
• ELSS mutual funds do not carry any entry or exit load.
• You can enjoy double benefits of capital appreciation like investments in equity and other tax-saving facilities.

Why invest in ELSS for tax savings?

ELSS is one of the very few tax-saving investments that gives investors the advantage of the Equity Linked Savings Scheme. It gives better returns than bank fixed deposits (FD), National Savings Certificate (NSC), provident funds, and various other schemes. 

Here are a few points that capture the key advantages of investing in ELSS:

• Diversification: Most ELSS funds invest across a distinct group of companies that vary from small cap to large cap from different sectors of the economy. ELSS funds integrate the element of diversification into the investment portfolio.
• Easy to invest: ELSS funds are simple to invest in because it has the benefit of tax deductions and gathering wealth over time.
• Easy to track: ELSS funds are easily tracked and monitored at any time, that is, 24×7 from the comfort of any place.
• Easy to withdraw: ELSS funds can be withdrawn at any time with just a few clicks. The withdrawal does not need any paperwork, and the procedure is simple.
• Paperless process: The whole investment cycle in ELSS funds is paperless and hassle-free, thereby making things less complicated.
• Low minimum amount: Most ELSS schemes allow you to begin investing with just Rs. 500. This feature ensures that you don’t have to wait to accumulate a significant investible corpus.
• SIPs: Although the ELSS scheme allows you to invest a lump sum amount, they can also use the Systematic Investment Plan (SIP) method; this specific method allows you to invest with lesser amounts and avail ELSS tax benefits, thereby affording them opportunities to amass wealth.
• Higher returns: ELSS mutual funds carry the potential of offering higher returns over a long period and can easily beat other asset classes, specifically fixed-income investments, by a broad margin over a long duration.
• Shortest lock-in period: The lock-in period of ELSS funds is only three years, which is the shortest among all other tax-saving investment alternatives available. NSC has a lock-in period of five years, whereas it is 15 yrs for PPF and five years for ULIPs.

Taxation on ELSS Funds as per the Budget 2024

Since ELSS funds fall under the category of equity funds, they are subject to the same taxation rules as other equity mutual funds. The Union Budget 2024 has introduced significant changes to the taxation of equity mutual funds, simplifying the tax structure while altering rates and benefits. Here is a detailed breakdown of the new tax rules:

Short-Term Capital Gains (STCG)

If you hold equity mutual funds for less than a year, the gains from these investments are classified as short-term capital gains. According to the new budget, these gains are now taxed at a rate of 20%, which has been increased from the previous rate of 15%.

Long-Term Capital Gains (LTCG)

For equity mutual funds held for more than a year, the gains are considered long-term capital gains. The key points to note under the new budget are:

• Tax-Free Limit: Gains up to Rs. 1.25 lakh in a financial year remain tax-free. This limit has been increased from the previous threshold of Rs. 1 lakh.
• Tax Rate: Any gains above Rs. 1.25 lakh are taxed at a flat rate of 12.5%. It was previously taxed at 10%.
• Indexation: It’s important to note that the benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for all asset classes, including equity mutual funds.

Indexation is a method used to adjust the purchase price of an asset (like property or gold) for inflation over the years. This adjusted price is then used to calculate capital gains. Previously, long-term capital gains from selling property, gold, or other unlisted assets were taxed at 20%, but you could use indexation to reduce your taxable profit. The new rule simplifies the tax structure by setting a flat 12.5% tax rate for all long-term capital gains. However, it removes the indexation benefit.

Summary

• No Indexation Benefit: This change affects the overall tax liability, potentially increasing it for long-term investors.

Factors to consider before applying for ELSS funds

Apart from looking at the ELSS fund’s performance over the past decade, you should also consider these factors before investing in  ELSS:

Investment plus tax planning

Many investors look at ELSS funds only with tax-planning intentions. ELSS mutual funds are the only type of mutual funds that invest in equity markets and offer tax benefits. If your sole objective is to save tax, there are many options available under Section 80C of the Income Tax Act. Hence, before you choose to invest in ELSS, ensure that you create an investment plan to help fulfil your financial expectations. Only then plan your ELSS investment. This plan should consider both, saving for medium- to long-term goals and tax planning.

Do not go overboard with your ELSS purchases

You might want to purchase the most recent and best ELSS funds every year from various asset management companies to save tax. While ELSS helps you amass wealth, having too many ELSS funds can result in over-diversifying your portfolio. Moreover, it can also be challenging to regulate multiple ELSS funds simultaneously.

Market-linked returns don’t provide any guarantee

You should also know that despite its potential for generating increased returns, an ELSS is subject to market risks. Considering the cyclical characteristic of markets, it makes sense to anticipate the temporary rise and fall of equities. So, even if you buy the best ELSS funds according to their past performances, they might not assure you higher returns in the future.

Tips for investing in ELSS funds

Here are some tips for investing in ELSS schemes:

• ELSS funds also help to compare the past performance of 3, 5, and 7-year periods while making a selection of the funds. However, no one can guarantee the past performance of any fund in the future. This step becomes necessary to assess how some funds are held up under varied market conditions.
• Instead of waiting to invest in the ELSS funds in the last month of the financial year, choose the SIP option for circulating any investments across the year. Choosing SIP comes with benefits from the average cost during market correlation.
• Furthermore, dividends are taxable at the hands of investors according to the choice of their tax slab.
• As direct plans have a shorter expense ratio than growth plans, the savings produced remain in the fund itself, producing higher returns for a long time.

Why should you invest via Tickertape?

Before deciding to invest in ELSS, you must conduct a basic analysis and thorough market study. Tickertape’s Mutual Fund Pages gives you detailed information about a fund, its performance, and key metrics. Its Tax Calculator also helps you ascertain your approximate tax liability and returns beforehand.

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Manonmayi

Content Writer at Tickertape

As a Content Writer at Tickertape, my writing style is both engaging and captivating. I take pride in my ability to craft compelling stories and informative content on recent developments in the financial world, which has earned me a dedicated following of readers. Beyond my professional pursuits, I am an avid reader and a true antiquarian, devoting my free time to exploring the world of literature.

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