Your Money: What Makes ELSS a Section 80C Topper

By Joydeep Sen

There are several investment options to save tax under Section 80C of the Income Tax Act. Logically, these are accompanied by a blocking period. It cannot be allowed that, to save tax, you make the investment today and exit it after a short period of time. We will discuss one of the many Section 80C options that is relatively more flexible in terms of time – Equity Linked Savings Scheme (ELSS).

These are equity funds and for the portfolio of these funds there is no restriction on fund manager i.e. large cap/small cap etc. For you, the investor, there is a lock-up period of three years. This three-year lock-up period is relatively less than other Section 80C options. However, we do not only recommend taking advantage of this three-year period. Equity is a long-term investment, say, 10 or 15 years. The aspects of ELSS that we want to highlight are:


As we just mentioned, you don’t need to retire right after three years of investing. Your money becomes free after three years of investment. You can withdraw as and when you need cash. It could be after, say, three years, five years or seven years. The longer your money stays invested, the more it grows with the stock market.


You may not need cash immediately after three years of investing, but you may not have as much surplus that year for Section 80C tax-saving investments. . In this case, you can withdraw up to Rs 1.5 lakh (depending on your lack of investment) from your ELSS fund and invest again. The long-term nature of equity investments remains intact, since you have effectively pursued it over a horizon beyond three years.

Tax efficiency

When you withdraw an amount from your ELSS fund after, say, three years of investing, there is more than just a withdrawal of the amount. Let’s say the stock market is growing at about 10% per year. You invest Rs 1.5 lakh in an ELSS fund, and after three years it becomes Rs 2 lakh. When you withdraw, say, Rs 1.5 lakh for that year’s tax investment, you still leave Rs 50,000 in the fund.

Moreover, the Rs 1.5 lakh you withdraw consists of a principal component and a return component. As long as the returns component is less than Rs 1 lakh, that part is tax exempt. In accordance with tax laws, long-term capital gains from stocks and mutual funds, up to Rs 1 lakh per fiscal year, are exempt from tax. Note, your investment in the ELSS fund is eligible for a tax benefit under Section 80C, but the returns are not tax-exempt per se. For example, dividends from ELSS funds are taxable in your hands according to your slab rates. Long-term capital gains from ELSS funds become tax-exempt, provided you do not have many other capital gains accrued in that year, i.e. they do not exceed Rs 1 lakh.

Long-term returns

In the fixed income options available under Section 80C, you have better visibility into your returns. In equities, over a long horizon of 10 or 15 years, returns are generally better than fixed income securities. Therefore, ELSS funds can also work for you from this point of view. At the cost of repetition, to get optimistic returns from ELSS funds, you should not only have a three-year outlook, but a longer one.

It is advisable to start your tax investments at the beginning of the financial year, in order to be able to space it out, and not to postpone it until next March. The concept of SIP works on averaging costs over sustained purchases over a period of time.

The writer is a corporate trainer and author.