Equity Linked saving scheme – More than just tax saving

Equity Linked saving scheme – More than just tax saving

Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C, since the investors can avail double benefits of tax savings as well as capital appreciation over long term. An ELSS is essentially a diversified equity mutual fund scheme with a lock in period of three years from the date of the investment. Historical data shows that, equity is the best performing asset class in the long term. Over the last 20 years, the BSE Sensex gave 11.4% CAGR returns beating both Gold (10.6% CAGR) and Fixed Deposits (7.3% CAGR). Mutual fund managers are tasked to outperform the market benchmark and so the outperformance margin of top performing ELSS funds versus asset classes will be much larger.

The lock-in period is a feature of all 80C investments. ELSS has the shortest lock-in period of 3 years, while other 80C schemes have lock-in periods of at least 5 years or longer. The lock-in period in ELSS, in fact, works in favor of the long term investors as the ELSS fund managers are able to hold high conviction stocks in their portfolio for a longer period of time to generate superior returns, because there are no redemption pressures in the first three years of the investment.

Many taxpayers make 80C investments simply for the purpose of claiming deductions from their taxable income; other investment objectives like capital appreciation, liquidity, taxation of interest / maturity amount etc are of minor importance. However, from a financial perspective, post tax returns are as important as tax savings in 80C investments. If you are risk averse investor then Government 80C schemes (e.g. PPF, NSC etc), bank tax saver FDs etc are suitable investment options. Investors should note that all the risk free 80C schemes are paying sub 8% interest currently. On a post tax basis, with the exception of PPF which is tax exempt, the returns are quite low. On an inflation adjusted basis, the post tax returns of such schemes are even lower – often close to zero or even negative.

Below are returns of various 80C investment options.

Tax saving investment options Lock-in period Returns Tax on returns
Bank Tax Saving Fixed Deposits 5 years 6.25-6.5% Taxable
National Saving Certificate (NSC) 5 years 7.80% Taxable
Public Provident Fund (PPF) 15 years 7.80% Tax Free
Equity Linked Saving Scheme category 3 years 13.09% LTCG Tax #
1) Bank FD rates – SBI rates as on Dec 2017  (General and Senior Citizen FD rates)
2) NSC rates – indiapost.gov.in
3) PPF – Ministry of Finance 
4) ELSS Category return of 3 years – CRISIL – AMFI ELSS Mutual Fund performance report Dec 2017
# LTCG @10% if the total long term capital gain in a FY is above Rs 1 Lakh


If you have some risk capacity, then ELSS investments can create substantial wealth for you. Rs 1 Lakh invested in Reliance Tax Saver (ELSS) Fund, 5 years back, would have grown to Rs 2.73 Lakh by March 22, 2018 – you can see that, the profit is much more than the tax saving (Source: Valueresearchonline)

However, investors should know that, mutual funds are subject to market risks and equity markets are intrinsically volatile. Your mutual fund investments will go up and down in value and sometimes you may even make a loss. But stock markets eventually recover and if you are ready to remain invested for a long period of time, even in the face of volatility, you can get very good returns from ELSS (tax saver) funds.

There are many ELSS funds in the market, but you should always select a fund based on the long term track record of the fund manager and the Asset Management Company. The fund manager of Reliance Tax Saver (ELSS) Fund since 2005 is Ashwani Kumar.

Fund manager tenure should be an important consideration for evaluating funds for investments because it enables investors to measure the fund manager’s performance in different market conditions (bull market, flat market, bear market etc). The fund manager seeks to maintain balance between large cap companies and mid cap companies. He endeavors to invest in potential leaders, with high growth prospects over medium term (2-3 years).

Reliance Tax Saver (ELSS) Fund has beaten its benchmark BSE – 100 across various time-scales. In the last one year (period ending February 28, 2018) the fund gave 19.93% return versus the benchmark return of 19.83%. In the last three years (period ending February 28, 2018) the fund gave 8.32% CAGR return versus the benchmark CAGR of 8.18%. In the last five years (period ending February 28, 2018) the fund gave 23.32% CAGR return versus the benchmark CAGR of 13.44% (Source: Valueresearchonline)

Reliance Tax Saver (ELSS) Fund was also able to beat Sensex returns by a large margin for the 3 and 5 year trailing periods (ending February 28, 2018). The two other mutual fund schemes managed by the fund manager, Reliance Vision Fund and Reliance Top 200 Fund were also able to beat their respective benchmark across most time-scales.

Taxation of returns should be an important consideration for any investment because it affects the net returns. ELSS capital gains of up to Rs 1 Lakh are tax free. Capital gains in excess of Rs 1 Lakh are taxed at 10%. Dividends paid by ELSS will be tax free in the hands of the investor, but from April 1 onwards, the AMC will have to pay dividend distribution tax at the rate of 10%, before paying dividends to investors. Interests paid by many 80C schemes are taxed as per the income tax slab rate of the investor. ELSS, as such, is one of the most tax friendly investment options under Section 80C.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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