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How can ELSS Funds Help you Save Tax & Create Wealth?

ELSS funds maximize the fusion of tax efficiency and wealth creation, offering a potent route for attentive investors.

  • 3,563 Views | Updated on: Apr 03, 2024

If you are thinking about where to invest to save tax, Equity-linked Savings Schemes or ELSS funds are a double win for your finances. They invest in stocks, which offer the potential for high returns over the long term, helping you build wealth. Additionally, when you invest in ELSS, you qualify for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, reducing your taxable income and saving your tax.

As a mutual fund scheme, ELSS uniquely matches equity investments with tax benefits under the Indian Income Tax Act. It is a type of mutual fund scheme that primarily invests in equity and equity-related instruments. ELSS funds offer tax benefits under Section 80C of the Income Tax Act in India.

7 Ways ELSS Funds Help You Save Tax and Create Wealth

ELSS investment plans are popular among those looking to save on taxes and create wealth. Here are seven ways in which ELSS funds can help you save tax and create wealth.

High Returns

ELSS funds can potentially deliver higher returns than traditional fixed deposit or debt funds. Another benefit of ELSS funds is that they offer higher returns compared to other tax-saving options, such as the Public Provident Fund (PPF) or National Savings Certificate (NSC). While these options may offer tax deductions, they do not offer the same level of returns as ELSS funds. For example, the average returns of ELSS funds have been around 12% per annum over the past five years, while PPF and NSC have offered returns of around 7% per annum.

Tax Exemption

ELSS are also tax-saving mutual funds as under Section 80C of the Income Tax Act, investments in ELSS funds are eligible for tax deductions of up to ₹1.5 lakh per financial year. This means that if you invest ₹1.5 lakh in an ELSS fund, you can claim a tax deduction of the same amount, reducing your taxable income and ultimately saving on taxes.

Diversified Investment

ELSS funds invest primarily in equities, providing diversification to your portfolio. Diversification helps to spread the risk across different sectors and companies, reducing the impact of any negative performance by one particular stock. By investing in a diversified portfolio of equity shares, you are spreading your risk across different companies and sectors. This reduces the chances of losing all your money in case of a market downturn. Additionally, ELSS funds are managed by professional fund managers who have the expertise and experience to select the best companies to invest in.

Short Lock-in Period

ELSS funds have a lock-in period of three years, which is the shortest among all tax-saving investment plans. This means that you can exit the fund after three years, unlike other tax-saving options like NSC and PPF, which have a lock-in period of five and 15 years, respectively.

One-time Investment Plan

ELSS funds are also a great option for those who want to invest in a one-time investment plan. Unlike other tax-saving options such as PPF or NSC, where you have to make regular investments over some time, you can invest a lump sum amount in an ELSS fund and enjoy the ELSS tax benefits.

ELSS funds are open-ended, which means you can invest in them at any point in time, unlike other tax-saving investment plans like NSC and PPF, which have a specific investment period.


ELSS funds offer greater flexibility compared to other tax-saving options. You can choose to invest in a fund that aligns with your investment goals and risk appetite. You can also switch between funds, which gives you the flexibility to adjust your investment strategy as per market conditions.

How do ELSS Funds Operate?

ELSS funds operate as equity funds with a diversified portfolio. These funds predominantly invest in stocks of publicly traded companies, encompassing various market capitalizations (including large, mid, and small companies) and industries. They aim to maximize long-term wealth growth. Fund managers meticulously select stocks through extensive market research to attain optimal portfolio returns adjusted for risk.

Investments made in an ELSS fund qualify for tax deduction under Section 80C of the Income Tax Act of 1961. While there exists no upper limit on the investment amount, the IT Act permits a tax deduction of up to ₹1.5 lakh. Allocating this sum to an ELSS can yield tax savings of up to ₹46,800 annually.

Considerations Before Investing in the ELSS Plan

Before investing in an Equity Linked Savings Scheme (ELSS) plan, there are several important considerations that investors should take into account to make informed decisions:

Investment Goals

Clearly define your investment goals, whether it is wealth creation, tax saving, or a combination of both. Understanding your financial objectives will help you choose the right ELSS fund that aligns with your goals.

Risk Appetite

Assess your risk tolerance level. ELSS funds primarily invest in equities, which are subject to market fluctuations and volatility. If you have a higher risk appetite and a longer investment horizon, you may consider investing in ELSS funds. However, if you have a lower risk tolerance, you might opt for a more conservative investment option.

Past Performance

While past performance is not indicative of future results, it can provide insights into the fund’s track record and consistency. Analyze the historical performance of the ELSS funds you are considering, preferably over various market cycles, to gauge their performance consistency.

Expense Ratio

Consider the expense ratio of the ELSS funds. Lower expense ratios indicate that a smaller portion of your investment returns is being deducted as fees. However, do not solely base your decision on expense ratio; consider other factors as well.

Portfolio Composition

Understand the portfolio composition of the ELSS funds you are interested in. Check the allocation to various sectors, market capitalizations, and individual stocks. Diversification can help mitigate risk, so ensure that the fund’s portfolio is well-diversified.

Exit Load

Check the exit load structure of the ELSS funds. Although the lock-in period is three years, some funds may have exit loads if you redeem your investment before a certain period. Understand the implications of early withdrawals on your investment returns.

Wrapping Up

ELSS funds are a great option for those looking to save tax and create wealth. They offer ELSS tax exemptions, diversification, high returns, a short lock-in period, and a one-time investment plan. It is always recommended to consult a financial advisor or a professional before making any investment decisions. It is also important to note that investments in mutual funds are subject to market risks, so it is essential to invest only what you can afford to lose and diversify your portfolio.

Key Takeaways

  • ELSS funds provide options for long-term wealth creation, making them an attractive investment option.
  • Diversification helps spread risk across different sectors and companies, reducing the impact of negative performance by individual stocks.
  • ELSS funds have a lock-in period of just three years, the shortest among all tax-saving investment plans, offering investors flexibility and liquidity compared to alternatives like NSC and PPF.
  • Investments in ELSS funds qualify for tax deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh annually.
  • Always look for past performances, expense ratios, and portfolio composition before deciding to buy ELSS plans.



What makes ELSS funds unique for wealth creation?

ELSS funds have the potential to deliver higher returns compared to traditional fixed deposits or debt funds.


Are ELSS funds suitable for one-time investments?

Yes, ELSS funds are an excellent option for one-time investments. Unlike other tax-saving options like PPF or NSC, which require regular investments over time, ELSS funds allow investors to invest a lump sum amount and still enjoy tax benefits.


Can I switch between ELSS funds?

Yes, investors have the flexibility to switch between different ELSS funds based on their investment goals and market conditions. This flexibility allows for adjustments in investment strategies as needed.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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