What are ELSS Mutual Funds?
ELSS full form for Equity Linked Savings Scheme, is a type of mutual fund for tax savings. These schemes can help investors achieve investment goal as well as helps save on tax. Under the Income Tax Act, Section 80C allows for tax deductions for investments (under the old regime) made in certain funds. The key features of this fund are its 3-year lock-in period. Besides, ELSS provides a diversified portfolio with exposure majorly to equity and equity-related securities that offer the opportunity for capital appreciation over a longer timeframe. Now that we know ELSS meaning let’s read about its benefits.

Benefits of ELSS Mutual Funds:
Investing in tax saver ELSS mutual funds has many benefits. As per Section 80C of the Income Tax Act, investors opting for the old regime can claim a deduction of up to Rs 1.5 lakh for investments in ELSS schemes. Under 80C investment options, if anyone invests Rs 1.5 lakh in these tax saving schemes, they can claim a deduction of Rs 1.5 lakh from taxable income. As such, investors investing in ELSS funds aim to get the dual benefit of tax savings and wealth creation.
The tax saving scheme also offers potential for capital appreciation through investment in equity and equity-related instruments.
These schemes are open-ended in nature, with a 3-year lock-in, which helps to invest more anytime through systematic investment plans. Besides, the 3-year lock-in period is the shortest lock-in provided by any other investment options available under section 80 C (under the old regime) of the Income Tax Act.
The portfolio is generally diversified across sectors and with no market capitalization bias.
Ways to invest in ELSS mutual funds:
Investors have the following options for investing: as a lump sum, through a SIP (systematic investment plan).

A lump sum is a one-time ELSS investment that is possible in cases where unitholders have surplus funds and higher risk tolerance.
SIP allows for a consistent and disciplined approach to ELSS investments. Regular SIPs, either weekly, monthly or yearly, can help average out investment costs.
ELSS vs other tax-saving options:
Besides ELSS, which can be one of the good tax-saving options for the salaried, there are various other tax-saving investment options. The other traditional and popular tax saving options with the possibility of wealth creation are National Savings Certificate (NSC), Public Provident Fund (PPF), Bank Fixed Deposits, Life Insurance and Employee pension funds.

Benefits of ELSS vis a vis other tax-saving options based on different parameters.

 
ELSS Fund –Tax Implications:
As per Section 80C of the Income Tax Act, investments made under the Equity-Linked Savings Scheme (ELSS) were formerly entitled to a tax deduction of up to Rs. 1.5 lakh. This implies that a person's investment in ELSS funds may be utilized to lower their taxable income.

In 2020, the government of India introduced various changes to the tax regime. While not completely scrapping the old laws, the new tax regime does not allow tax deduction under ELSS but provides a tax rebate of Rs 7 lakh. However, those who have opted for the old tax regime can continue to invest up to Rs 1.5 lakh in ELSS funds in a financial year and claim tax deductions on the contribution under Section 80C.

Conclusion:
ELSS mutual funds can be a good tax-saving option. However, like any other mutual fund, these too carry risk, hence it is advisable to take prudent decisions. Several ELSS funds are available, so make sure you do your research and pick the best ELSS mutual fund that will work with your financial plan and help you pay less in taxes.

FAQs:
What are the risks and ELSS returns?
These funds may not generate returns as anticipated by unitholders as they primarily invest in market-linked instruments and can be influenced by market movements. Nevertheless, when held for a prolonged period, these funds have the potential to outperform market volatility and generate favourable returns for investors.

How do I declare my ELSS investment on my tax return?
Under Section 80C of the Income Tax Act, ELSS funds are eligible for tax exemptions. Individuals can avail deductions of up to Rs. 1.5 lakh on their investments in ELSS funds. To claim these deductions, unitholders need to submit necessary supporting documents at the time of filing their Income Tax Returns.

Can I exit my ELSS investment before the lock-in period is over?
After the completion of the 3-year lock-in period, investors have the option to redeem the mutual fund units. However, the exit option is not available in this type of scheme.