How Can ELSS Mutual Funds Be Used To Create Wealth While Saving Tax?

• Date : February 27,2025

Let’s be honest: when it comes to tax-saving investments, most of us either procrastinate until March or blindly park money in the same old instruments that don’t help grow wealth. Sound familiar? If you're looking for an option that not only provides tax benefits but also builds long-term wealth, ELSS Mutual Funds might be the perfect solution.

What is ELSS Mutual Fund?

An ELSS mutual fund (Equity Linked Savings Scheme) is a type of equity mutual fund with a statutory lock in of 3-years, that qualifies for tax deductions under Section 80C of the Income Tax Act 1961. In simple terms, ELSS gives you the dual benefit of wealth creation and tax savings.

ELSS Mutual Fund Tax Benefit Under Section 80C

Investing in ELSS Funds allows you to claim a deduction of up to ₹1,50,000 from your taxable income, reducing your tax liability. For those in the highest tax bracket, this can mean savings of up to ₹46,800 annually.

What sets this tax-saving mutual fund apart among 80C options is its shortest lock-in period of three years and its potential for higher returns compared to traditional tax-saving instruments.

The Wealth-Building Potential of ELSS Mutual Funds

Now, let’s address the elephant in the room: can an ELSS mutual fund help you build wealth? The short answer is YES. Here’s why:

1. Equity Exposure
   ELSS funds invest predominantly in stocks. Historically, equity has outperformed most other asset classes over the long term. While there’s risk involved, the potential for higher returns makes it worth the ride. A good ELSS mutual fund could deliver returns upwards far outpacing traditional options like PPF or FDs.
    
2. Power of Compounding
   Investing ₹1.5 lakh in one of the best ELSS mutual funds 10 years ago with an average return of 12.62% could have grown to ₹3.4* lakh, helping meet financial goals like home purchases or child education.
    
3. Minimal Lock-In Period
   ELSS mutual funds come with a lock-in period of just 3 years. While you cannot withdraw your funds during this time, the shorter lock-in provides better liquidity and flexibility.
   
   The table below provides a comparison of investment options available under Section 80C of the Income Tax Act, 1961, outlining their lock-in periods and expected returns:
    

   Investment Instrument	Lock-in	Return
   Equity Linked Savings Scheme (ELSS)	3 years	Market-Linked
   Public Provident Fund (PPF)	15 years	7.10%
   National Savings Certificate (NSC)	5 years	7.70%
   Unit Linked Insurance Plan (ULIP)	5 years	Market-Linked
   5-year Fixed Deposit (FD)	5 years	6%-7%

    
4. Inherent Discipline
   The 3-year lock-in period of ELSS mutual funds encourages investment discipline by preventing early withdrawals. It fosters a long-term approach, allowing investments to benefit from market growth.
    
5. SIP Option
   With ELSS funds, you can invest through a Systematic Investment Plan (SIP), which allows you to contribute small amounts regularly. This approach not only makes investing more affordable but also helps average out the cost of investments over time.
   
   

Are ELSS Mutual Funds Tax-Free?

Here’s where things get a bit nuanced. While the investment qualifies for tax deductions under Section 80C of the Income Tax Act 1961, the returns are not entirely tax-free. Gains from ELSS are subject to long-term capital gains tax (LTCG).

• Gains up to ₹1.25 lakh in a financial year are tax-free.
• Gains above ₹1.25 lakh are taxed at 12.5%.

So, while returns from ELSS mutual funds are taxable, they still offer a relatively tax-efficient way to grow your wealth compared to other investment options.

Tips to Maximize Your ELSS Returns

• Start Early
  The earlier you invest, the longer time your money has to grow.

• Stay Invested
  Don’t exit right after the lock-in. Hold your investments for at least 5–7 years to ride out market fluctuations.

• Use SIPs
  Staggering your investments reduces the risk of market timing.

• Diversify
  Don’t put all your eggs in one basket. Invest in a mix of ELSS funds and other asset classes.

 

NJ ELSS Tax Saver Scheme

The NJ ELSS Tax Saver Scheme follows a rule-based investment strategy, ensuring consistent and disciplined decision-making. It focuses on high-quality stocks with strong financials and high growth potential.

The following are certain characteristics of the NJ ELSS Tax Saver Scheme:

• Quality Investment
  The scheme maintains a concentrated portfolio of 25 quality stocks, ensuring a disciplined and robust investment approach.

• Tax Saving
  Provides tax benefits under Section 80C of the Income Tax Act 1961, helping investors reduce their taxable income.

• Wealth Creation
  With the inherent lock-in period of 3 years and focus on quality stocks, the scheme offers the potential for capital appreciation, aiding in wealth accumulation.
  
  
• Focus on Small & Mid Cap
  The scheme primarily focuses on mid-cap and small-cap stocks, providing opportunities for higher returns due to their growth potential.
  
  

Conclusion

ELSS mutual funds offer a unique combination of tax-saving benefits and wealth creation potential, making them an ideal investment option for individuals looking to grow their wealth while reducing their tax liability. If you're looking for an efficient tax-saving investment, what is ELSS mutual fund is a question you no longer need to ask, you have the answer.

FAQs

1) What is ELSS Mutual Funds' full form?

ELSS stands for Equity Linked Savings Scheme. It is an equity mutual fund that provides tax benefits under Section 80C.

2) What is ELSS in mutual funds?

An ELSS mutual fund (Equity Linked Savings Scheme) is a type of equity mutual fund with a statutory lock in of 3-years, that qualifies for tax deductions under Section 80C of the Income Tax Act 1961.

3) Is ELSS tax-free after 3 years?

Returns from ELSS mutual funds are not entirely tax-free. They are subject to long-term capital gains (LTCG) tax, where gains of up to ₹1.25 lakh in a financial year are exempt from taxation. However, any gains exceeding this limit are taxed at a rate of 12.5%.

*Assuming investment in Equity Fund and an average Sensex return of 12.62% p.a. as per AMFI Best Practices Guidelines Circular No.135/BP/109-A /2023-24 dated September 10, 2024. The figures/projections are for illustrative purpose only. The situations/results may or may not materialise in future. Past performance may or may not be sustained in future & is not a guarantee of any future returns and should not be used as a basis for comparison with other investments.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.