Tax Saving ELSS Mutual Funds

by Manshu on January 2, 2011

in Mutual Funds,Tax

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.

{ 19 comments… read them below or add one }

Vineet G. December 21, 2011 at 11:28 pm

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 ?


Ankur Sinha December 23, 2011 at 12:53 pm

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 ?


Manshu December 23, 2011 at 10:00 pm

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.


Ankur Sinha December 23, 2011 at 11:34 pm

So in new DTC mutual funds will be taxable after one year ? ans ELSS after 3 years ?


manish nautiyal January 11, 2012 at 5:02 pm

what I have read on the net is that DTC will remove ELSS


Manshu January 12, 2012 at 2:36 am

Yes that’s right Manish though it doesn’t look like DTC is going to get implemented this year.


manish nautiyal January 11, 2012 at 5:06 pm

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.


Manshu January 12, 2012 at 2:36 am

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.


ROOP January 28, 2012 at 4:49 pm

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 ?


Jitendra P.S.Solanki February 12, 2012 at 9:05 pm


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.


Prakash February 13, 2012 at 12:41 pm

Please let me know the latest elsa m fund


Roshni Bhatia February 19, 2012 at 10:52 pm

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.


Ashish March 20, 2012 at 10:00 am

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.


bisvas March 20, 2012 at 11:18 am

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


Garvit September 16, 2012 at 3:22 pm

Sir, please can you explain me how dtc implementation is going to affect ELSS mutual funds ???

thanks and regards


Garvit September 16, 2012 at 3:43 pm

do they consider mark to market component while selling these mutual funds after lock in period ?


mohsin January 28, 2013 at 9:45 pm

I more information about else fund investment….


mohsin January 28, 2013 at 9:48 pm

Since when elss fund investment started is really better to invest in elss than ppf


Indian Stock Market Tips February 22, 2013 at 9:58 am

Nice post. Thank you for sharing. Stock market trading can fetch you a lot of profit if we play it smart.


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