As the tax-savings season nears, we start running around to find the best tax-saving investment. Tax-saving mutual fund or Equity linked savings scheme (ELSS) is one of the popular tax-saving options. Almost all of us are aware that there is a lock-in of 3 years. However, there are a few aspects that many of us aren’t aware of (even I wasn’t aware of some of these points until I came across such aspects in a blog post).
Equity Linked Savings Scheme (ELSS), 2005 were notified by the Finance Ministry (and not SEBI). Hence, ELSS schemes are governed by these rules in addition to those put down by SEBI for mutual funds. To be honest, these rules will not change your opinion of ELSS but it is good to know these rules.
1. Investment shall be in multiples of Rs 500 with minimum investment being Rs 500.
2. ELSS units can be transferred, pledged or assigned only after 3 years.
3. The scheme shall be open for a minimum period of 3 months during a financial year. This aspect is not so important though. Majority of the ELSS schemes, in practice, are open ended schemes. Hence, you can invest in such schemes all year round.
4. If you invest in ELSS through SIP, every SIP installment is a fresh investment. This is where I have seen a few investors get confused. Such investors were under the impression that the lock-in of 3 years was from the date of first investment in ELSS. That is not the case. By the way, every investment (and not just through SIP) is a fresh investment.
For instance, if you purchase units through SIP installment on December 15, 2016, units purchased through this installment shall be locked in till December 15, 2019. Units purchased through SIP installment on January 15, 2017 shall be locked in till January 15, 2020.
This is an important aspect. Many proponents of ELSS (for tax-savings) argue that ELSS has the shortest lock-in period among all Section 80C investments. However, what is conveniently ignored is that every investment in ELSS is subject to a fresh lock-in of 3 years.
Under PPF, only your first investment is locked for 15 years. For a PPF account which is 12 years old, the lock-in is only for 3 years. For an account which has completed initial maturity of 15 years and has been extended, the maximum lock-in is 5 years. By the way, you can make partial withdrawals and take loans against your PPF balance.
I am not saying PPF is better than ELSS. However, you need to understand the fine print of the regulations before making a decision.
Read: ELSS vs PPF
5. The fund can be invested in equity, cumulative convertible preference shares and fully convertible debentures and bonds. There are a few more conditions (not as useful though). 80% of the funds should be invested in aforesaid securities. Remaining 20% of the assets can be parked in money market or liquid investments to handle redemptions. There are a few exceptions though.
6. As I understand, ELSS funds cannot invest in arbitrage.
7. The restriction on investments (Point. 6) need to be seen with another Income Tax rule where the fund needs to invest 65% into equities to maintain equity status (for taxation)
8. Each AMC can have just one ELSS scheme. Many have multiple schemes, by the way.
9. In the event of death of the investor, the nominee or the legal heir can withdraw the amount only 1 year after the date of allotment of units to the deceased. Hence, if the investor dies six months after purchasing the units, the nominee has to wait for at least six more months to be able to sell the units. Note nominee can get the units transferred to him/her much earlier but can’t sell those until 1 year is over. Essentially, the lock-in period goes down from 3 years to 1 year in the event of demise of the original investor.
To be honest, there is not much in these rules that will make or break your decision to invest in ELSS. But it is always good to know.
13 thoughts on “Did you know this about ELSS schemes?”
Respected Deepak Sir,
I have invested in Axis Long Term ELSS MF via SIP mode. It has been 2 years. 1st SIP dated 15th December, 2014.
But at that time I didn’t know difference between Regular & Direct Plan.
Now I want to switch to direct plan. I have some doubts regarding switching and lock-in period for existing regular plan. Hope you will clarify.
Doubt 1: I plan to stop monthly payment to my existing ELSS regular plan, but I will not withdraw units earned until respective units don’t complete 3 years lock-in period; my query is, “Will I incur exit load or any other charges if I don’t invest anymore i.e. if I stop monthly payment from 15th Jan 2017 but not withdraw units earned? Do I have to keep investing for 3 years i.e till December 2017 in the case of this ELSS SIP?”. I understand that every SIP is fresh investment & is locked in for 3 years.
Doubt 2: I have declared this investment for tax deduction but if I stop SIP & don’t pay for remaining financial year what I need to do in regards of that. And can I claim money invested so far i.e. from April 2016 to December 2016; 5000*9= 45000 for the tax deduction? Also, I want to claim new investment of 5k per month in the Axis ELSS direct plan which I want to start in this month itself. How do I correct tax deduction details I have declared earlier as I am stopping payment henceforth?
Doubt 3: Should I start fresh SIP under direct plan & invest existing regular plan units when they mature in this fresh direct plan as lump sum apart from my monthly payment of 5k in a direct plan?
And also if in my fresh ELSS direct plan, suppose I start SIP of 5000 per month, can I invest any random amount at any random date in the same direct plan apart from my monthly auto-debit of 5000 rupees?
Doubt 4: Is it a good idea to invest in ELSS over other MF plans just to save tax? I am planning to increase my current invest of 5k per month to 8k per month in ELSS for tax deduction purpose. Also, will it be better if I invest SIP of 4k in Axis ELSS & 4k in DSP Blackrock ELSS or should I invest 8k alone in Axis ELSS?
Waiting for your reply. Thank you in advance. I admire all your articles and plan to read all of them.
Dear Sumit,
You are welcome.
1. There is no exit load implication on stopping a SIP. Exit load and capital gains implications arise only at the time of redemption of units.
2. You get deduction for both direct and regular plans. Hence, nothing to worry about. You can stop regular plan SIP and start direct plan SIP. Tax man will be least worried.
3. Yes, that is an option you have. Yes, you can invest on any random date. SIP is merely a way to invest (and not the investment itself).
4. There is no conclusive evidence that ELSS is better than non-ELSS funds. Personally, I wouldn’t invest more than I am required to meet my Section 80C limit. However, nothing wrong if you do that. Can’t comment on specific schemes.
Thank you for reply…
Just to clarify doubt no. 3….can I invest any random amount, say 1 lakh rupees, in same ELSS plan where I am already contributing SIP of 5k per month.
Yes Sumit, you can inves lumpsum in the same scheme where you are investing through SIP.
Got it!
Thank you for prompt replies!
You are welcome, Sumit. Do share the post with your friends.
Yes… I have already recommended your Website to my roommates! Will share it with anyone who is interested.
Honest work will always attract more customers!
Hope to see the day when more people stop paying heed to agents & distributors involved in insurance, Mutual Funds or any other schemes. They dupe common people big time.
We need more impartial financial advisors like you.
I am planning to buy one of your offerings once I get salary bump next year.
Appreciate it, Sumit. Thanks!!!
Sure.
And yes, not all agents or distributors are bad. They put in hard work and deserve to be compensated but customer needs should be the topmost priority.
Dear Mr. Deepesh –
Thanks for your ELSS Article and it’s very helpful which I shared with my friends through Facebook. Since ELSS has a lock-in period of 3 years and is not subjected to tax after 3 years and for regular equity-oriented funds, the tax is 10% (Upto a certain limit it’s tax-free too) after 1 year, what’s the big advantage of ELSS over regular equity-oriented mutual funds?
Yes, there is a advantage of Rs. 150000 under Section 80 C which is Tax-Exempt for ELSS but since we all utilise the Section 80 C for other investment vehicles like PPF, Housing Loan Installments et al, where is the big advantage of ELSS?
The ONLY advantage I am seeing with ELSS is when the market valuation is extremely low (Say that happened in 2009 Period when Sensex was hovering around 8000), then it makes sense to invest in ELSS on that particular time period (May be, it can happen anytime in future but we never know when it can happen) and claim Section 80 C deduction too and if we leave the investment for 7 to 10 years, then it makes sense as we can claim that it’s Tax-Free with EEE Category (Exempt on Investment, Exempt of Dividend Growth and Exempt on Capital Gains Growth).
With the above case, my questions are:
(1) When the above situation happens, can we skip the PPF Investment on that particular financial year and invest in ELSS fund claiming Section 80-C and from next financial year, can we again continue to invest in existing PPF?
(2) Is the Maximum Limit one should invest is only Rs. 150000 in ELSS (or) Can we invest any amount in ELSS with a lock-in of 3 years and obviously can claim a max. of Rs. 150000 as Tax-Exempt under Section 80-C?
Please answer at your convenience.
Thanks
Bavan
Hi Bavan,
ELSS is also an equity fund. So, tax on LTCG introduced in Budget 2018 applies to ELSS too. This is an old and is yet to be updated.
Right. if you don’t need tax benefit, then there is no need to invest in ELSS.
1. You need to make minimum investment in PPF every year.
2. You can invest any amount in ELSS. Just that it may not make much sense to invest more than Rs 1.5 lacs.
Thanks Deep for your fast response and clarification. Since the LTCG gets applied to ELSS, then the only big advantage is claiming the Investment amount of Rs. 150000 under Section 80-C.
You are welcome. Yes, as compared to other equity funds.
ELSS or Equity Linked Savings Scheme Mutual Fund. have the dual advantage of Tax-saving & potential for better returns than traditional Tax-saving Investment Products, this category of Mutual Fund Schemes is must-have for every investor.