Understanding ELSS Mutual Fund Returns and Tax Deductions

Rishi Jain
Published on Feb 09, 2024



Investing in Equity Linked Savings Schemes (ELSS) mutual funds not only offers the potential for wealth creation but also provides tax benefits under Section 80C of the Income Tax Act. However, most of the newbie  investors often wonder whether the returns generated from ELSS investments are taxable.


Understanding ELSS Mutual Funds:

ELSS funds, known for their dual benefits of tax savings and wealth creation, primarily invest in equity markets. These funds come with a lock-in period of 3 years, encouraging long-term investment horizons.


Tax Benefits under Section 80C:

One of the key attractions of ELSS funds is their eligibility for tax deduction under Section 80C. Investors can claim a deduction of up to Rs. 1.5 lakh in a financial year, reducing their taxable income. This makes ELSS an attractive option for those looking to save taxes while aiming for capital appreciation.


Taxation of ELSS Returns:

Contrary to popular belief, the returns generated from ELSS funds are not entirely tax-free. While the principal amount invested qualifies for tax deduction, the returns are treated as capital gains. ELSS returns are subject to the same capital gains tax rules as other equity investments.


Capital Gains Tax on ELSS:


Short-term Capital Gains (STCG): If you redeem your ELSS units before the completion of one year, the resulting gains are considered short-term capital gains. These gains are taxed at a flat rate of 15%.


Long-term Capital Gains (LTCG): If you redeem your ELSS units after one year, the gains qualify as long-term capital gains. As of now, LTCG on equity funds, including ELSS, exceeding Rs. 1 lakh in a financial year are taxed at 10%, without the benefit of indexation.



In conclusion, while ELSS mutual funds offer tax benefits on the invested amount, the returns are subject to capital gains tax. Investors should be mindful of the holding period to determine whether the gains will be treated as short-term or long-term, each having its own tax deductions. ELSS remains an attractive investment avenue, blending tax efficiency with the potential for substantial returns.