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ELSS vs Other Funds: Decoding the Best Option

Wed Jun 28 2023


Mutual funds are popular investment options that allow individuals to invest in a diversified portfolio of stocks, bonds, or other securities. Equity Mutual Funds and Equity-Linked Savings Schemes (ELSS) are two common types of mutual funds that investors often consider. In this blog, we will explore the key differences between these two funds, their similarities, and the tax implications associated with investing in them.

Understanding Equity Mutual Funds

An Equity Mutual Fund is a type of mutual fund that primarily invests in stocks of companies listed on the stock exchange. The main objective of these funds is to provide long-term capital appreciation and growth. However, as they invest in equities, they are subject to market risks, and short-term fluctuations are common. It is advisable to stay invested for at least 5 to 7 years to reap the benefits of equity investments fully.

Equity Mutual Funds charge an expense ratio, which is the annual fee paid to the asset management company for managing the fund. They may also apply an exit load upon redemption, encouraging investors to stay invested for the long term.

Read more: What is Form 16

Understanding ELSS

ELSS, or Equity-Linked Savings Scheme, is a type of Equity Mutual Fund that offers the added advantage of tax benefits. Like other equity funds, ELSS invests a significant portion of its corpus in stocks, aiming for long-term capital appreciation. The unique benefit of ELSS is that investments up to Rs 1.5 lakh are eligible for tax deductions under Section 80C of the Income Tax Act.

ELSS comes with a lock-in period of 3 years for tax purposes, meaning you cannot withdraw your investment before the completion of this period to avail of the tax benefits. However, it's essential to remember that your units will continue to remain invested even after the lock-in period expires.

Difference between ELSS and Equity Mutual Funds

  1. Tax Benefits: The primary difference lies in the tax-saving benefits. ELSS offers tax deductions under Section 80C of the Income Tax Act 1961 up to rupees 1.5 Lakh, while other equity mutual funds do not provide any specific tax benefits.
  2. Lock-in Period: ELSS has a lock-in period of 3 years from the date of purchase, whereas other equity mutual funds do not have any mandatory lock-in period.
  3. Investment Objective: Both ELSS and equity mutual funds aim for long-term capital appreciation, but ELSS stands out due to its added tax-saving objective.
  4. Flexibility of Withdrawal: After the lock-in period, ELSS funds can be withdrawn like any other mutual fund, subject to exit loads, if any. In contrast, other equity funds have no restrictions on withdrawals after the initial purchase.


Similarities between ELSS and Equity Mutual Funds

  • Investment Concept: Both ELSS and other equity mutual funds pool investors' money and invest in a diversified portfolio of stocks.
  • Tax Implications: Both funds are subject to taxation under capital gains rules. Long-term capital gains (held for more than 12 months) are tax-exempt up to Rs 1 lakh, while gains above this threshold are taxable at 10% plus cess. Short-term capital gains (held for less than 12 months) are taxable at 12% plus cess.
  • Expense Ratio and Exit Load: Both funds charge an expense ratio for managing the fund and may apply an exit load on redemption.

Tax Implications under New Income Tax Regime

Under the new income tax regime, investors have the option to choose a lower tax slab by forfeiting various exemptions and deductions, including those offered under Section 80C. For individuals in the lower tax slab (up to Rs 9 lakh), investing in ELSS under the old tax exemption model might be more beneficial. However, for those earning above Rs 9 lakh, the new flat tax scheme could be advantageous.

Read more: Step-by-Step E-Filing ITR


Investing in mutual funds can be a rewarding way to build wealth and achieve financial goals. When considering ELSS vs. other equity mutual funds, the decision should primarily revolve around your tax-saving goals and investment horizon. It's crucial to understand the investment objective, risk factors, performance track record, and potential growth of the fund before making any investment decision. Remember, while ELSS provides tax benefits, all investments in equities carry inherent market risks, and careful planning is key to successful investing.

We at TaxNodes can help ensure a smooth and hassle-free experience while filing income tax returns.

Astik Dubey

byAstik Dubey

Astik is a law student diving deep into indirect Tax and business law. With a flair for business writing and a special interest in crypto taxation, he turns complexity into captivating articles. Join his enlightening blog, where law and business intersect.

  • Astik Dubey
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