Why ELSS is the best option for Tax Saving?

Income Tax has various seasons and as of now most of us would be scrambling just to get all Investment proofs in place so that we can make the most of the Section 80 C benefit. While there are a lot of options in front of you as an investor, read on to understand why ELSS is the best avenue where you could invest while saving on Income Tax:


Equity in India has proven to be an asset with the highest returns over years. While it shows short term volatility, when you remain invested for a certain number of years, that time period is good enough to ride out the volatility and benefit from the returns. ELSS mutual funds are the only Income Tax saving investment option transparently linked to equity, as even market-linked ULIP schemes have a lot of grey areas between insurance and investment. All the other options end up investing in debt category which while giving fixed returns while still be a short change over the kind of returns you could earn over the years. 

Shortest lock-in

ELSS mutual fund schemes come with a 3 year lock in period. Compared to the other investment options like ULIP, National Savings Certificate or PPF where the shortest lock in period is five years, ELSS funds end up with the shortest defined lock-in period. With the first three years as a mandatory lock-in for your funds, it works well since three years are also a minimum threshold period for equities to show a proper upswing. 

More favourable Income Tax regulation

Since ELSS funds comprise of equity and also have a lock-in of 3 years, whenever you redeem the appreciation would form part of the Long term capital gains (LTCG) in Equity. While there was no tax on LTCG in Equity for quite a few years, even with the recent introduction of 10% tax on gains above Rs. 1,00,000 in a financial year make it pretty favourable. Even with government instruments like National Savings Certificate, the interest is liable to attract tax.


For all other tax saving investment products, there is a long drawn process at least initially or with some at every investment. For instance, any time that you want to invest in National Savings Certificates, you are expected to go to a Post Office, queue up, take a form for NSC and then undertake an archaic process. For “investing” in insurance, most providers would expect you to undergo a medical test. For PPF again, you would need to go through a long drawn process with a bank. For ELSS however, you can easily sign up on Money Front  and invest with in the direct plan, while sitting at home. You could also start a monthly SIP so that for next year you end up contributing every month while making use of any market volatility instead of getting a rude shock to invest a big amount at the last minute.

Varied options

While ELSS is the name of the category, it is not a plain vanilla product. Within ELSS too, depending on your risk appetite and the historical returns, you could choose funds from various AMCs. 

There are a few funds in the category meant for aggressive investors, that have more than 10% allocation to Small cap funds making them more susceptible to market volatility but also giving them a higher probability to outrun it in the next bull run. If you are looking to lock it and forget it for a few years without letting your emotions get in the way, this can help with wealth creation. For this purpose, consider Principal Tax Saving, Aditya Birla Sun Life Tax Relief 96, L&T Tax Advantage and IDFC Tax Advantage.

Another category of funds meant for cautious investors wanting to take lower risk can choose funds that allocate more than 25% of their portfolio in a mix of Mid and Small cap stocks. This means that the fund is balanced fairly well with a major chunk invested in the stable behemoths of Large caps with some exposure to Small and Mid caps to help with capital appreciation as well. In some ways, it’s like a tree rooted to the ground, with it’s top gaining height with every bull run. Some funds falling in this category are Mirae Asset Tax Saver, Motilal Oswal Long-Term Equity, Axis Long Term Equity and DSP Tax Saver. 

If you are a first time investor, choose a lower risk more stable fund with more than 75% investment into Large Cap stocks. While the strategy is conservative, it works for you if this is your first foray into the world of equity and also you want to reduce your risk of loss in the three years of locking in the funds. Some of these safer funds are JM Tax Gain, Invesco Tax Plan, Tata Tax Savings and Franklin India Taxshield. 

This primer on ELSS funds is here to serve as a handy guide for you as a  good means of Income Tax saving investment. Ensure to allocate atleast some funds into it, so that even if you choose to go for assured returns through any of the other debt instruments, you do not end up missing out on the wealth creation opportunity that ELSS provide.