Tax Saving ELSS Mutual Funds

This is yet another post from the Suggest a Topic page, and in this post I’m going to take a look at the ELSS (Equity Linked Saving Schemes) mutual funds or tax saving mutual funds in a  little bit of detail.

Let me start off by telling you that there are plans to phase out the tax breaks on ELSS mutual funds with the introduction of the Direct Tax Code (DTC), so this avenue is going to be closed in the coming years.

However, you can still invest in it this year and get tax breaks. These tax saving mutual funds are covered under Section 80C, which means that you can invest a maximum of Rs. 1 lakh in them, and reduce that amount from your taxable income.

There is a lock-in period of 3 years on such funds, which means that you can’t sell these funds within 3 years of your purchase date.

I saw an interesting question on Value Research some time ago where someone had written in to ask what happens when they select the dividend re-investment option in the case of a ELSS fund.

The dividend that is invested back in the scheme is considered fresh investment, so what happens is that this money is further locked in for three years, and this can create an infinite loop. I’m not sure what will happen going forward with DTC coming in, but it’s best to play it safe, and go for the Dividend or Growth option of the ELSS you’re buying.

Before we get down to the options available under ELSS funds, let’s recap the points discussed so far:

  1. The tax benefit of ELSS will be phased out with the introduction of DTC.
  2. The tax benefit is still available this year.
  3. There is a lock in of 3 years, so you can’t sell these tax saving mutual funds within 3 years of purchase.
  4. If you use the dividend re-investment option then the amount re-invested will be treated as fresh investment, and will be locked in for 3 years from the time of re-investment.

ELSS Mutual Fund Options

I wrote a post on how to find tax saving mutual funds some time ago, and I used that information to get a list of all the ELSS mutual funds currently available in India, and then narrow down options from there.

Then I looked at the funds that were around for 5 or more years, and took the 10 best performing out of them.

After that I noted their expense ratio, as well as their inception date in the table below. Doing this gave me a list that has some tax saving funds that have been around for a very long period, and have done reasonably well over that period. The expenses are important because they eat up your returns, so I wanted to highlight them as well.

The limitation with this list is that it doesn’t contain any mutual funds that have been around for less than 5 years even if they performed well. For example – DSP Blackrock is a ELSS mutual fund that has been around for about 4 years, has done well during that time, but is missing from this list.

Name Inception Date 5 year returns Expense Ratio
Birla Sun Life Tax Relief – 96 March 1996 16.57% 1.96
Canara Robeco Can Equity Tax Saver March 1993 22.31% 2.38
HDFC Tax Saver March 1996 17.80% 1.86
ICICI Prudential Tax Plan August 1999 15.48% 1.98
SBI Magnum Tax Gain Scheme – 93 March 1993 16.32% 1.78
Principal Personal Tax Saver March 1996 16.42% 2.19
Franklin India Tax Shield April 1999 17.34% 2.10
Sundaram Tax Saver Nov 1999 17.73% 1.96
Sahara Tax Gain March 1997 22.31% 2.50
Reliance Tax Saver August 2005 15.14% 1.88

All data from Value Research

This list is not sorted in any particular order, and that’s deliberate because as soon as you sort something your brain tends to think of it as best to worst from top to bottom, but that’s not the case.

For mutual funds – the best mutual fund is the one that will give you the maximum return for your holding period, but since that’s in the future, there is no way to really predict which one will do better than the rest.

In the absence of that I compiled a list of long standing performers, and have presented you with that information, and if you think this criteria makes sense, then you can select one or two funds from this list for your investment.  

I will also recommend going to Value Research and doing some more research, and playing with their tools because they do have a lot of good tools in there.

158 thoughts on “Tax Saving ELSS Mutual Funds”

  1. hello onemint team..esp loney for excellent insights
    please advise if i have ppf for 80 c, regular SIP in MF, and other useless insurances( along with term insurance) which mop up 80c , should i take ELSS or not dumping the junk policies (like endowment/cashback/ LIFE HAPPY schemes ?

    What about infra bonds 20000 which have been removed from this fiscal

  2. If I buy ELSS mutual fund in name of my wife, can I take tax exemption for that. Or it has to be in my name only.

  3. This is the time of the year where investors rush for tax saving and are bombarded with tax saving schemes. This article provides apt information to take correct tax saving decisions. Thanks for sharing.

  4. We are three brothers . We just sold our old house for Rs.55,00,000/- . The LTCG calculated thereon is about Rs.42,00,000/-. Now we want to construct a new house.
    Our question is whether we have to invest in equal proportion i.e. Rs.14 lacs each or can invest in odd ratio i.e.10 lacs,18 lacs & 14 lacs for the construction of new house to save the LTCG u/s 54 of the I T Act ?

    1. Roop,

      To save LTCG under Sec 54, you have to invest the capital gains within two years for purchasing or within three years for construction of new house. Hence, you invest in whatever manner the house construction should gets completed within three years from sale date.

  5. Hi mansu
    I want to purchase one hdfc mf for that I have to open SIP a/c and after that I want to purchase SBI mf for that again I have to open SIP a/c. For every new mf I have to open one new SIP. What is the procedure.

    1. Hmmmm, you don’t open a SIP account – you open a Demat account and then you start a SIP – so you don’t need to open a new account every time you have to invest in a new mutual fund.

  6. Once the Lock in period of 3 years is over for ELSS and I redeem after 3 years , will it attarct any income tax ? or it will come under long term tax gain , which is 0% tax ?

    1. Per current laws you won’t have to pay any capital gains so if you sold something today then that will not attract capital gains. 3 years down the line if Direct Tax Code is implemented and there is capital gains then – at the time you will have to pay tax.

  7. Dear Sir
    What is diffrence to buy MF dierct or thorugh agent ?
    what is the commition retio on MF, mean one time or on every SIP?
    What is the CAMP office ?

  8. Hi Manshu

    I want to invest in tax saving MF. But somewhere I read that govt will remove ELSS from next year. So can I invest it now?

    1. If DTC is implemented next year then the tax benefit of ELSS will go away, but the tax benefit does exist today and you can invest in them today.

    I have purchased L144G SBI- Infrastruscture Fund -I- Growth
    @10 on july2007 but now its value is8.20 Can I redeem all units
    RelianceEQUITY ADANTAGE FUND -RETAIL PLAN -GROWTH PLAN on 08Aug 2007 but The Reliancecapital Asset Managment limited has changed my E A F -R P -GP toRELIANCE NATURAL RESOURSES FUND GROWTH PLAN -GROWTH OPTION since 25/02/2008 of which N A V is LOW
    Let me know what should I do to regularise my oruginal Plan

    1. I’m sorry but I have no idea about what you’re wanting to do. Did you buy this through an agent who can help you now or how did you buy these funds?

  10. Hye, i hve invested rs. 4000 per month through sip from april 2011 onwards now my questions is= can i redeem all units in april 2012? Next question Which wil be most profitable- i wil extend the period for another two year for further Rs. 4000 sip investment OR i will leave my first year investment that is 48000 for another two year.

    1. I assume you have invested in ELSS right? In that case your lock in is 3 years, and you can’t redeem before that. The 3 years is calculated from the time of purchase, so you can’t redeem anything on April 2012.

      1. I have not invested in elss . I hve invested only for one year in different mutual fund which is not tax saver. So please now reply my question as asked

        1. If you haven’t invested in ELSS mutual funds then yes you can redeem them at your will. You can redeem all of them in April 2012.

          If you redeem within a year then some funds charge an exit load of 1% which means they deduct a percent from what they give you. You need to check if the funds you bought did have this clause, and if you’d like to avoid it.

          I can’t understand the rest of your question – there is no golden rule that says extending the period will or won’t help. I’m sorry I can’t answer that.

  11. I am going to join in a company in this November. Then, how to reduce my tax ? In which plans I need to invest my money so that I will be benifited from my tax ? ?

    1. If you’re going to join a company this Nov, and sounds like this is your first company then you may not even reach the taxable limit which is Rs. 1.8 lacs till March, so first find out if you do or not.

  12. I am going to join in a company in this November. Then, how to reduce my tax ? In which plans I need to invest my money so that I will be benifited from my tax ?

  13. Manhsu – You are doing a great job.

    One question, I have no need of doing any tax saving. However, can block my funds > 3 years. In such an event Is ELSS a god option compared to other general open Mutual funds.

    Appreciate your advise.


    1. Thanks – I wouldn’t do that. There is absolutely no reason to block the funds like that since these type of funds haven’t done better than other funds, and you are better off buying a diversified large fund or balanced fund that has done well.

  14. Hi Manshu,

    I have taken a HDFC SL CREST Policy few days back.I just want to exit from it ,please let me know whether it is possible or do i have to wait for 5 years.If yes what is the amount i will be loosing ,i bought the policy on oct 03 2011 with 50k as every year premium for 5yrs.Please help me out..

    Thanks and Regards,

    1. Hi Ajith,

      My knowledge on ULIPs is very limited as I’m not interested in them at all, and I’m afraid I won’t be able to give you an accurate answer. You could try asking this question to the agent who sold you this and hope for a way out from that. I think there must be a way out but with penalties and fines.

  15. Hi Manshu,

    I have a question regarding redeeming the ELSS fund. If some one opted the Monthly SIP option to invest in the ELSS fund then How he can redeem all the units of the fund after 3 years. For ex. I started investment in ELSS fund from Jan 2009 and the last SIP (if I am planning to redeem after 3 years lock in period) will be invested in Dec 2011.

    1. So would I able to redeem all the units in Jan 2012 or only the units which I purchased in Jan 2009 from first SIP.
    2. Does it mean every SIP locked for 3 years?
    3. If I want to redeem all the units of ELSS fund then it would only be possible after 3 years of last SIP investment.

    Appreciate your response…

    1. Hi Sachin,

      1. All units individually should exceed three years, they aren’t clubbed together, so units bought in Oct 2011, can be sold only after Oct 2014 and so units bought in Nov 2011 after 2014.

      2. The units are locked for 3 years. Whether you buy SIP or lump sum doesn’t have an impact on this. Your units will be locked 3 years from the date of purchase.

      3. You can start selling individual units as soon as the three year period gets over on them. You don’t have to wait for 3 years to end from the late of the last installment of the SIP.

      I hope that answers your questions, and let me know if you have any follow up questions.

  16. Hi Manshu,

    I want your expert opinion on few funds that I have invested in. I am not in need of any immediate money, but the returns from these funds are very less as compared to the bank rate( currently) on deposits. My question is should I stay invested or move out of these funds?
    if stay invested- for how much more duration?
    if move out- what instrument to invest in along with the time horizon?
    The funds are:-
    1. SBI Infrastructure fund SR 1 (g)- Invest price- 10, current NAV- 8.28. Invested in 2007.
    2.SBI Tax Advantage Sr-1 (G)- Invest price- 10, NAV-10.49. Invested in 2008.
    I wish to channelize my investments in a better way..and your expert opinion is much appreciated.

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