Tax-saving mutual funds (also known under the term Equity Linked Savings Scheme (ELSS) are mutual fund schemes which provide investors tax advantages under section 80C in the Income Tax Act, 1961 in India. The funds invest mostly in equity-related or equity-related instruments, which offer higher returns than traditional tax-saving instruments, including Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving fixed deposits (FDs).
ELSS funds have the option of locking in for three years, which means that the investment cannot be released prior to the time limit. This lock-in period ensures that investors remain invested in the long-term and reap the rewards of equity investments. In addition, ELSS funds have the potential to yield higher returns than other tax-saving instruments because they invest mostly in equity-related and equity-related instruments.
Investors are able to invest up to up to. 1.5 million in ELSS funds and get Tax deductions as per Section 80C in the Income Tax Act. The tax benefits are applicable only to the amount you invest and not on returns generated by the fund. Therefore, investors need to take into consideration the risks involved with equity investments prior to taking a position in ELSS funds.