Equity Linked Savings Scheme (ELSS) is an effective tax saving investment tool for new investors as well as seasoned pros. 

When you invest in ELSS, Section 80C of the Income Tax Act offers an exemption up to a maximum limit of Rs.1.5 lakh. Also, ELSS funds have a lock-in period of three years, which is the lowest when compared to other tax saving instruments such as the National Pension Scheme, Public Provident Fund, among others. Importantly, ELSS mutual funds can be regarded as an excellent tool for wealth creation because of its mandatory lock-in period that can ensure a long-term approach to investing. You can consider ELSS as ideal tax saving mutual fund to begin your investment journey in the equity market. 

How much can you invest in ELSS?

You can invest as much as you want in ELSS as there is no fixed upper limit. However, the maximum exemption permissible under Section 80C remains capped at Rs.1.5 lakh per annum. So, for example, you can invest up to Rs.3 lakh to enjoy the full benefit up to Rs.1.5 lakh under Section 80C. But where can you invest the rest?

As mentioned before, ELSS is a mutual fund tax saver with a lock-in period of three years. Regardless of the benefits offered by Section 80C, investing in ELSS means the lock-in period remains the same. This means if you invest the remaining Rs.1.5 lakh in ELSS, your money will be locked in for three years at the very least, without any tax benefits. 

However, if you choose to invest in another diversified equity fund without a lock-in period, the fund may generate high returns over a long-term. Besides, you have the flexibility to switch between different funds based on their performance. You could obtain higher returns than ELSS by investing in funds that commensurate with your risk appetite, financial goals, and overall market conditions. 

Comparing returns with diversified equity funds

Finally, you can determine the return advantage offered by ELSS by comparing it with diversified equity funds over a five to ten year period. On comparison, apart from the tax benefit under Section 80C there is no other benefit that tips the scales in favour of ELSS tax saver mutual funds.

Fund category Three year returns Five year returns 10 year returns

Equity Large Cap 11.46% 13.33% 15.88%

Equity Multi Cap 10.35% 16.22% 18.45%

Equity Mid Cap 9.27% 21.02% 22.37%

Equity ELSS 10.41% 16.4% 17.81%

Conclusion

Simply put, investing in ELSS funds beyond Section 80C limit does not add any investment value to the portfolio. It is better to invest in mutual funds which can offer the same benefits without the liquidity risks or mandatory lock-in period. A combination of mid/multi cap and large-cap funds can generate similar kind of exposure as ELSS funds. Moreover, when you wish to rebalance your portfolio, you can do it with ease.

Joyce Laroche