The ELSS funds find a special position among the instruments in which savings and investments, up to Rs 1 lakh in a financial year, qualify for tax deductions under Section 80C of the Income Tax. This is the only pure equity investment option available compared to the otherwise fixed return, fixed tenure options. Investments in the ELSS come with a 3-year lock-in, and offer tax free redemption after the 3-year term. This category also happens to be unique as it is the only category in which investments are open to only retail investors and HUF.
The funds in this category are managed like any other diversified equity fund, and they can have different market capitalisation exposure. The 3-year lock-in allows fund managers to manage these schemes without constant redemption pressure.
One of the merits of investing in an ELSS fund is that it instills investment discipline among equity investors. The 3-year lock-in ensures this tax saving option is not treated as an opportunity to make a quick exit the moment one sees profits.
The other advantage of ELSS schemes is in their tax treatment being unlike the NSC or the 5-year bank fixed deposit. Although the savings in these fixed return investments qualify for tax deductions under Section 80C, the interest earned in them is treated as income and taxed accordingly.
Following are India's finest tax planning funds:
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