Do you know with investment in mutual funds, you can save income tax too. Tax planning with investment is crucial for maximizing your disposable income. For this, ELSS (Equity Linked Savings Scheme) comes with a solution to invest for higher returns and also save tax too.
It allows investors like you and I, to save on taxes while building wealth for long-term goals like buying a property. In this post, we will discuss the advantages of ELSS and also list out the top performing Equity Linked Savings Scheme (ELSS) on the basis of last 5 years performance.
Save tax under 80C bracket
ELSS investments qualify for tax deduction under Section 80C of the Income Tax Act, 1961. This you might be using for saving taxes under the old regime. But, if you are not utilizing your 1.5 lakhs of savings, you can buy an ELSS for the long term with the aim of achieving a goal of having a dream car (Drive Your Dream: Unlock Interest-Free Car Financing) or house (A detailed Strategies to build down payment for Dream Home).
Here’s how it works
- You invest in an ELSS mutual fund scheme.
- The amount you invest is deducted from your gross taxable income under Section 80C.
Capital Gains and Property Purchase: Section 54F
If you are following my blog, you know that capital gain is of 2 types – Long term capital gain (LTCG) and Short term capital gain (STCG)
When you redeem your ELSS units after the 3-year lock-in period, the profit earned is considered as Long term capital gain (LTCG) and you can also avail exemption of tax on Rs. 1 lakh profit and on the remaining profit pay tax at rate of 10%.
But, If you use the LTCG earned from your ELSS investment to purchase a residential property in India within one year of redemption (or 3 months before), you can claim exemption from capital gains tax under Section 54F.
Limitation of ELSS
- Limit of income tax deductions under 80C is 1.5 lakhs and if you are already utilizing it, it won’t be beneficial for you.
- ELSS investments come with a lock-in period of 3 years. This means you cannot withdraw your money before 3 years from the date of investment (with some exceptions).
- This tax exemption has a maximum limit. The entire LTCG amount might not be exempt if the investment amount used to purchase the property exceeds the total cost of the ELSS investment and the LTCG earned.
- You can only claim this exemption once in your lifetime.
As per Budget 2023: The maximum deduction is capped at Rs 10 crore.
These limitations does not mean you should not invest as the returns matter on your investment. You have to invest based on your goals and to achieve that it can be a better choice than any other investments. If you wisely use the deductions and exemptions benefit under Income Tax, you can save a lot on your returns as well as investments.
List of top performing ELSS funds 2024
You can also refer to any app as per your convenience. I have listed out the top performing ELSS funds from ETMoney Rank
| Fund Name | Expense Ratio in % | Returns for last 5 years (per annum) | ETMoney Rank |
| PGIM India ELSS Tax Saver Fund | 0.78 | 21.22% | 1 |
| HDFC ELSS Tax Saver Fund | 1.14 | 26.97% | 2 |
| Union ELSS Tax Saver Fund | 1.53 | 23.42% | 3 |
| Mahindra Manulife ELSS Tax Saver Fund | 0.61 | 23.77% | 4 |
| Bank of India ELSS Tax Saver Fund | 1.19 | 30.86% | 5 |
| SBI Long Term Equity Fund | 0.96 | 30.72% | 6 |
| Kotak ELSS Tax Saver Fund | 0.56 | 29.50% | 7 |
| Canara Robeco ELSS Tax Saver | 0.62 | 22.48% | 8 |
| Quant ELSS Tax Saver Fund | 0.76 | 39.22% | 9 |
| Bandhan ELSS Tax Saver Fund | 0.53 | 27.21% | 10 |
Research well before investing and follow these parameters that i have posted in my previous blog – Steps to explore the Right Mutual Funds for Your Goals
Maximizing Benefits
- Invest Early and Regularly: Start investing in ELSS early to benefit from the power of compounding and potentially earn higher LTCG for property purchase. Consider a Systematic Investment Plan (SIP) for regular and disciplined investing.
- Choose the Right ELSS Fund: Research and select a well-performing ELSS fund that aligns with your risk appetite and investment goals.
Conclusion
You can easily draw from the above, ELSS mutual funds offer a dual benefit – tax savings as well as wealth creation. You need to strategically utilize Section 80C for tax deductions and take advantage of Section 54F for LTCG exemption on property purchase. If you plan properly, you can achieve your financial goals while minimizing your tax burden.
Remember, careful planning and professional advice can help you make well informed investment decisions and optimize your tax benefits.
