ELSS & tax saving
Ask which regime you are in before anything else
Combine investment planning with potential tax benefits through Equity Linked Savings Schemes (ELSS).
- First question
- Old regime or newThe newer regime largely does without these deductions.
- What a deduction does
- Reduces taxable incomeNot your tax. What you save is that amount at your own rate.
- The ceiling
- Prescribed by the sectionShared across everything you claim under it, not per instrument.
- ELSS lock-in
- Three yearsThe shortest of the options, and absolute while it runs.
- Each SIP instalment
- Locks separatelyNothing unlocks all at once, which surprises people.
- What an ELSS is
- An equity fundWith equity's returns and equity's bad years.
- Cost of a direct plan
- Lower, every yearSame portfolio, no distributor commission inside it.
The deduction ceiling, the rates, which regime applies by default, what each instrument pays and how each maturity is taxed are set in the Income-tax Act and amended by each Finance Act, and the interest rates on the small savings schemes are notified periodically. This page describes the structure rather than the figures for any year. The Act as it applies to the relevant year, the scheme information document and a chartered accountant are the authoritative sources, and nothing here is tax advice or a recommendation to invest in any scheme.
Three things to be clear about before committing anything in March. First, an ELSS is an equity mutual fund: mutual fund investments are subject to market risks, the value can fall, and a lock-in means you cannot act on that fall for the period it runs. Second, a deduction is worth your own marginal rate and nothing more, so a rupee claimed does not save a rupee of tax, and under the newer regime it may be worth nothing at all. Third, a tax break is not a reason to buy something you would otherwise not own: a poor investment with a deduction attached is still a poor investment, and a three-year or fifteen-year commitment made on the last working day of March is made with no time to think about it. Read all scheme related documents carefully, and take advice from a qualified professional on anything specific to your own position.
Six things about the two regimes
The rates, the thresholds and which one applies by default are amended regularly and are not quoted here. What does not change is how the choice works and what it does to everything else on this page.
Lower rates, or deductions. Not both.
The newer regime offers a different rate structure in exchange for giving up most deductions and exemptions, including the ones the instruments on this page rely on. The older one keeps them. Neither is better in general; which one costs you less depends entirely on how much you actually claim.
Consequence: the answer is arithmetic on your own numbers, not a rule of thumb somebody repeated.
One of them applies unless you choose otherwise
A default applies if you make no election, and which one is the default has itself been changed. People have found themselves in a regime they did not pick, having invested for deductions they could not then claim. It is worth confirming rather than assuming, every year.
Consequence: check what your employer has recorded for you before you make March decisions.
The comparison is your total claim, not one instrument
Deciding between regimes means adding up everything you would claim in the old one: the standard deduction, the section this page is mostly about, health insurance, housing interest, and whatever else applies to you. That total, at your rate, against the rate difference in the new one, is the whole calculation.
Consequence: somebody with a home loan and a family policy often reaches a very different answer from somebody without.
The choice can usually be revisited
For most salaried individuals the election is made each year, so a decision taken this year is not a decision taken forever. Where business income is involved the position is more restrictive. Either way, an instrument with a fifteen-year lock-in outlives many such elections, which is worth thinking about before committing to one.
Consequence: a long lock-in taken for a deduction assumes you will still be claiming deductions in ten years.
In the new regime, these are just investments
An ELSS with no deduction attached is an equity fund with a three-year lock-in, and an ordinary equity fund does the same job without one. A five-year tax-saving deposit is a deposit with a longer lock than you need. Judge each of them on what it does with your money, because that is all that is left.
Consequence: if the deduction is worth nothing to you, prefer the version without the lock-in.
Some things survive either way
A few items are not dependent on the older regime, and the list changes with each Finance Act. The employer's own contribution to a retirement scheme is one area where the treatment differs from the rest, which is why the regime decision and the salary structure conversation are often the same conversation.
Ask a professional: which specific items survive in the year you are planning for. The list is not stable.
This is a description of how the choice is structured and is not tax advice. The rates, thresholds, which regime applies by default, which deductions survive in each and the conditions attached to changing your election are set in the Income-tax Act and amended by each Finance Act. Confirm the position for the relevant year with a qualified tax professional.
Six instruments, sharing one ceiling
They all qualify for the same deduction and they are otherwise nothing like each other. What separates them is the lock-in, what the money actually does while it is locked, and how the maturity is taxed at the end.
Equity linked savings scheme
An equity mutual fund with a lock-inA diversified equity mutual fund that qualifies for the deduction and carries a lock-in of three years, the shortest of the options under the section. Beyond the lock-in it behaves like any other open-ended equity scheme.
- Each instalment of a monthly plan locks separately for three years from its own date. Nothing unlocks all at once.
- It does not mature. When the lock-in on a set of units ends they simply become available, and you may leave them invested.
- The direct plan holds exactly the same securities as the regular one without the distributor commission inside it.
What to check first
- The expense ratio, for the direct plan, against comparable schemes
- What the scheme actually holds, from the monthly portfolio disclosure
- Whether you would own an equity fund at all with no tax break attached
- That you will not need this money within the lock-in
Assuming a three-year-old monthly plan is free. Only the instalments made more than three years ago have been released, and the one paid this month is locked for the full period from now. People discover this at precisely the moment they wanted the money.
Other instruments qualify under the same section, including national savings certificates, the scheme for a girl child, the senior citizens savings scheme, the principal repaid on a home loan and children's tuition fees. Eligibility, ceilings, lock-in periods, interest rates and the tax treatment of each maturity are set in the Income-tax Act and in the rules governing each scheme, and are amended from time to time. Nothing here recommends any instrument or scheme.
A monthly plan does not unlock after three years
This is the single most misunderstood thing about an ELSS, and it is entirely mechanical. Each instalment buys units on its own date, and each of those sets of units is locked for three years from that date. Nothing unlocks all at once.
LockedFree to redeemThe instalment you make today is locked for the full period, whenever you started.
What actually happens at the end of the lock-in
Nothing. The units simply become available, and there is no maturity, no payout and no requirement to do anything. An ELSS is an open-ended equity scheme that carries on exactly as before, so if the reason you bought it still holds, staying invested is a perfectly good answer.
Consequence: redeeming on the day the lock-in ends is a decision, not an obligation, and it is rarely the better one.
You cannot redeem early for any reason
Not for an emergency, not at a reduced value, not with a penalty. Units under lock-in cannot be redeemed, switched between schemes, switched between plans, transferred or pledged. In the event of the unit holder's death the rules make provision for the nominee, and that is effectively the only exception.
Consequence: nothing that might be needed within the period should be here, however good the deduction looks.
Choose the growth option and the direct plan
An income distribution option pays part of the value out and reduces the net asset value by that amount, which is a partial withdrawal taxed as income rather than an extra return. The direct plan holds exactly the same securities as the regular one without the distributor commission inside it, so it costs less every year you hold it.
Consequence: two choices made once, at the point of investing, that compound for as long as you stay.
ELSS, PPF or a tax-saving deposit
All three qualify for the same deduction. They differ in what the money does while it is locked, how long that is, and what you are left holding at the end.
Which of the three fits the money you are setting aside
Two questions about this particular amount. The matching column below is highlighted. This describes how the three work; it is not tax advice, not investment advice, and it assumes you are in a position to claim the deduction at all.
You want the money in equity, and among the options under this section the ELSS is the only one that does that, with the shortest lock-in of the three at three years from each purchase. Choose the direct plan and the growth option, use a monthly instruction from April rather than a lump sum in March, and understand that each instalment locks separately from its own date. A bad three years is entirely possible and the lock-in means you cannot act on it, which is the price of the arrangement.
This matches a stated requirement to the characteristics of three instruments. It is not tax or investment advice, it takes no view on any scheme, bank or fund house, and it assumes the deduction is available to you, which it may not be under the newer regime. Mutual fund investments are subject to market risks; read all scheme related documents carefully.
Attribute ELSS PPF Tax-saving FD
| What the money does | Buys shares, through an equity mutual fund | Lends to the government, at a notified rate | Sits with a bank, at a contracted rate |
| Lock-in | Three years, the shortest of the three | Fifteen years, with partial withdrawal later | Five years |
| Who stands behind it | Nobody. The value is whatever the market says | The government | The bank, with deposit insurance to the prescribed limit |
| Is the return known | No, and it can be negative over the period | Yes for the quarter, at a rate notified periodically | Yes, at the rate contracted |
| Can you add monthly | Yes, and each instalment locks separately | Yes, within the annual ceiling | No, each deposit is its own contract |
| How the maturity is taxed | Under the equity capital gains rules | Exempt, on the prescribed basis | Interest is income, taxed at your slab |
| Recurring cost | The expense ratio, every year | None | None |
| Premature exit | Not possible during the lock-in, for any reason | Restricted, with partial withdrawal permitted later | Not permitted during the five years |
| What moves the value | The market, daily | Nothing. It accrues | Nothing. It accrues |
| Best suited to | Money you will not need, with a long horizon | The steady, long-dated part of a plan | Somebody who wants neither variation nor a long lock |
| The honest drawback | A bad three years is entirely possible | Fifteen years is a very long commitment | The interest is taxed every year as it accrues |
What the deduction is worth, and when your money is free
Both calculators work on figures you type in. Neither knows the ceiling for this year, the rates, or which regime you are in. What they do is answer the two questions people most often get wrong about this subject.
The deduction is a one-off, and the investment is not. Whatever the first calculator shows, you get it once, in the year you claim it, and then you are holding the thing for three years or fifteen. So the question that actually decides the outcome is whether you would want to own this instrument with no tax break attached at all. If the answer is yes, the deduction is a welcome bonus. If the answer is no, a one-year benefit has bought you a multi-year commitment to something you did not want.
Six steps, starting in April rather than March
Almost everything that goes wrong with tax saving goes wrong because it was done in the last fortnight of the financial year. None of these steps take long, and the first one takes ten minutes.
Work out, on your own numbers, what you would actually claim in the older regime and what that is worth against the rate difference in the newer one. If the newer regime wins, nothing else on this page reduces your tax and you can stop planning around deductions entirely.
Provident fund deducted from salary, life insurance premiums due this year, the principal portion of your home loan and children's tuition fees all count towards the same ceiling. Subtract that total before deciding how much new money is needed. For many people the gap is far smaller than expected.
Choose what you would be content to own for the lock-in period with no tax break attached. Equity for money you will not need and can watch fall; something that does not vary for money you want back intact. The deduction is the same either way, so it cannot be the tie-breaker.
A monthly plan from April removes the March scramble, averages the price you pay over twelve purchases instead of one, and means you are never choosing an equity fund on the last working day of the year. It also makes the amount affordable rather than a single large outflow.
Submitting the declaration and then the proofs by the deadline means the tax deducted from your salary is correct through the year rather than being over-deducted and reclaimed later. Missing the window does not lose the deduction; it delays your money until you file.
Account statements, premium receipts, the provident fund statement and the home loan certificate, filed as they arrive. They are what the employer asks for, what the return is built from, and what you will want if anything is ever questioned.
Six ways tax saving goes wrong
The market falling is not on this list; that is the ordinary risk of owning equity. These are the ones created by doing it for the tax break.
Doing all of it in March
A large amount into an equity fund on one day, chosen in a hurry, at whatever price the market happens to be, with a three-year lock-in attached. Every part of that sentence is a decision made badly, and the only reason it happens is the calendar. A monthly plan from April removes all of it at once.
Guard: set the instruction in April. The March version of you will not thank the April version enough.
Buying an insurance policy as an investment
A policy sold for the deduction it carries, with a long premium commitment, a surrender value far below what was paid in the early years, and a return that is rarely stated as a return. Insurance and investment are two different jobs, and the products that attempt both usually do neither especially well.
Guard: buy cover for protection and investments for returns, and ask for the figure as an annual percentage.
Investing past the ceiling without noticing
The limit is shared across everything claimed under the section, and anything beyond it earns no deduction at all. Money put into a locked instrument above the ceiling has taken on the lock-in and received nothing in return, which is the worst of both arrangements.
Guard: total up the existing commitments first. The second calculator field on this page exists for exactly this.
Redeeming the moment the lock-in ends
An ELSS does not mature. If the reason for holding an equity fund still applies, selling on the day it becomes available and buying another one to claim a fresh deduction achieves a taxable event, a fresh three-year lock, and no change in what you own. It is motion mistaken for a plan.
Guard: new money for a new claim, and leave the old holding alone unless you have a reason to sell it.
Collecting a new scheme every year
A different ELSS each March, chosen from whichever topped the table that year, leaves a portfolio of eight schemes holding substantially the same companies at a higher average cost than one would have charged. The lock-in makes it hard to tidy up afterwards, so it accumulates.
Guard: keep adding to one or two schemes you are happy with rather than starting a new one annually.
Locking money you were going to need
The lock-in is absolute: no early redemption, no penalty option, no hardship provision. Money set aside for a deposit, a wedding or an emergency, committed to a three-year or fifteen-year instrument for a one-year tax benefit, is the mistake that causes real difficulty rather than mild regret.
Guard: build the emergency reserve first, somewhere you can actually reach it, and only then think about deductions.
Every line, what it is charged on, and who charges it
Rates move with circulars and with the Finance Act, so the table gives you the structure and tells you where the current figure is published. On an ELSS almost everything is deducted inside the scheme, which is what makes it easy to overlook.
| Line item | Calculated on | Levied by | Where the current rate is published |
|---|---|---|---|
| Expense ratio | The value of your ELSS holding, every year. Deducted inside the scheme, so it never appears as a debit anywhere. | Fund house | The factsheet, for both plans |
| Commission, in the regular plan | Your holding. Paid to a distributor out of the scheme, which is why the regular plan's expense ratio is higher than the direct plan's. | Fund house | The difference between the two plans |
| Exit load | Nothing on an ELSS. The lock-in does the job an exit load would otherwise do, so schemes in this category do not usually charge one. | Fund house | The scheme information document |
| Stamp duty | Every purchase and every switch-in, on the amount invested. | Government | Notified rate, under the Stamp Act |
| Securities transaction tax | The redemption value of units in an equity-oriented scheme, which an ELSS is. | Government | Notified rate, in the Finance Act |
| Account opening | Nothing. There is no fee to open a folio and none to hold one. | Yukti | Free |
| Entry load | Nothing. Entry loads are not permitted on mutual fund schemes. | Nobody | Prohibited by regulation |
| On a PPF account | Nothing recurring. A nominal charge applies to open the account at some institutions. | Bank or post office | The institution's schedule |
| On a tax-saving deposit | Nothing to open or hold. The cost is that the interest is taxed each year as it accrues. | Bank | The bank's schedule of charges |
The expense ratio is the cost that matters on an ELSS and the one you will never see billed, because it is taken from the scheme's assets before the net asset value is struck. Over a holding measured in years rather than the three-year minimum, the difference between the direct and regular plans of the same scheme becomes a substantial figure.
Work out what the break is actually worth to you
The first calculator takes your own marginal rate and the amount you were investing anyway, and shows what the deduction saves and what it is worth on the extra money you are committing purely to claim it. If you are in the newer regime, set the rate to zero and read the answer.
How the money is taxed when it comes back
The deduction is only half the story. What each instrument costs you at the end differs enormously, and rates and thresholds are set in the Income-tax Act and amended by each Finance Act, so they are not quoted here.
An ELSS redemption is a capital gain
It is an equity-oriented scheme, so the gain on redemption follows the equity capital gains rules, with a threshold of long-term gain exempt each year. Because of the lock-in, any gain is long term by the time you can access it, which is a genuine structural advantage of the instrument.
Check the current figures in: the Finance Act for the relevant year, or with a chartered accountant.
Every instalment has its own clock and its own cost
On redemption the units are taken out in the order they were bought, each tranche carrying the price it was purchased at. A long-running monthly plan redeemed in part therefore produces a gain computed across several purchases rather than one, which is why the capital gains statement matters.
Practical effect: the fund house provides a statement for the year. It is not optional reading.
Some instruments are exempt at the end
Certain small savings schemes are structured so that the contribution is deductible, the accrual is not taxed and the maturity is exempt, on the basis prescribed. That treatment is what makes a long lock-in tolerable, and it is set in the statute rather than promised by the institution.
Consequence: compare a taxable return against an exempt one only after adjusting for your own rate.
Deposit interest is taxed as it accrues
On a tax-saving deposit the interest is your income for each year it accrues, whether or not you received it, and tax is deducted at source above a threshold. Over a five-year term that is five years of tax on a return you have not yet been paid, which changes the comparison considerably.
Practical effect: the headline rate on a deposit is a pre-tax figure. The one that matters is after your slab.
A deduction can be taken back
Some instruments carry conditions after the claim: surrendering a policy or closing certain accounts before a prescribed period can cause deductions already allowed to be added back to your income in the year of the breach. It is not a penalty so much as a reversal, and it is written into the relevant section.
Consequence: check the conditions attached before exiting anything you have claimed a deduction on.
What we give you, and what we do not
You will get account statements and a capital gains statement for the year, and the registrar sends you a consolidated statement independently of us. None of that is a tax opinion, and the choice of regime in particular is a personal computation on your whole income rather than a question about any one investment.
We are not tax advisers.: For anything beyond the structure described here, ask a chartered accountant.
This is a description of how the treatment is structured and is not tax advice. Rates, thresholds, holding periods, deduction ceilings, which regime applies and the conditions attached to each instrument depend on the law in force for the relevant year and on your own circumstances. Please consult a qualified tax professional.
The tax saving glossary
Every term you will meet on a declaration form, a scheme document or a payslip, defined in one or two sentences. Type to search, or jump by letter.
37 terms
A contract paying a regular income for life, bought with part of a retirement corpus at exit. The requirement to buy one is a defining feature of that route.
The year in which the income of the preceding financial year is assessed and the return is filed.
The difference between what you redeemed units for and what they cost. Short-term and long-term gains are taxed differently and the boundary is set in the Act.
An additional levy computed on the tax payable. It is why the saving from a deduction is slightly more than the amount times the headline rate.
The statement of intended investments given to an employer at the start of the year, so that the tax deducted from salary is correct through it.
An amount removed from your taxable income. What you save is that amount at your own marginal rate, not the amount itself.
The version of a scheme bought without a distributor. Identical portfolio, no commission paid out of the scheme, and therefore a lower expense ratio.
An equity linked savings scheme: a diversified equity mutual fund qualifying for the deduction and carrying a three-year lock-in on each purchase.
A structure in which the contribution is deductible, the accrual is not taxed and the maturity is exempt. It is what makes a long lock-in tolerable.
The annual cost of running a scheme, deducted inside it. You never see it billed, which is why it is the cost most often ignored.
April to March, the period whose income is being taxed and against which the deduction ceiling is measured.
The account number under which your holding with a fund house is recorded by the registrar.
The certificate an employer issues showing salary paid and tax deducted, including the deductions it gave effect to.
The option in which income is retained inside the scheme and reflected in the net asset value rather than paid out.
The option in which part of the value is paid out. The net asset value falls by the amount paid, so it is a partial withdrawal taxed as income.
A period during which units cannot be redeemed, switched, transferred or pledged for any reason. It is absolute while it runs.
The rate applying to your next rupee of income. It is what a deduction is worth to you, and it differs from your average rate.
The end of an instrument's term. An ELSS has none: the lock-in ending simply makes units available, and the scheme continues.
The net asset value: what one unit is worth, struck once each business day. A high or low figure says nothing about whether a scheme is expensive.
The rate structure offering lower rates in exchange for doing without most deductions, including the ones the instruments on this page rely on.
The national pension system: a retirement account with an additional deduction of its own, a chosen asset mix and an annuity requirement at exit.
The rate structure that retains deductions and exemptions. Which of the two costs you less depends entirely on how much you actually claim.
The public provident fund: a government-backed account with a fifteen-year term, a notified rate, and exempt treatment on the prescribed basis.
Providing the employer with evidence of the investments declared, by the deadline it sets, so that the deduction is given effect in the salary computation.
The retirement fund into which salary is deducted. The employee's own contribution already counts towards the same ceiling before any fresh investment.
Selling units back to the scheme at the applicable net asset value. Not possible during a lock-in, for any reason.
The agency that maintains folios, processes transactions and sends you your account statements and capital gains statement.
The version of a scheme bought through a distributor, whose commission is paid out of the scheme. Same portfolio, higher expense ratio.
The adding back of a deduction already allowed, where an instrument is exited before a condition attached to it has been met.
The legal document setting out what a scheme may invest in, what it charges and what its lock-in and load structure are.
A systematic investment plan: a fixed amount invested automatically at a fixed interval. In an ELSS each instalment locks separately from its own date.
A flat amount allowed against salary income. Whether it is available depends on the regime, and the list changes with each Finance Act.
What a policy pays if you stop it early. In the first years it is usually well below what has been paid in, which is rarely volunteered.
Pure life cover with no investment component. The cheapest way to buy protection, and it carries no maturity value by design.
Fees paid for the education of children, which count towards the same ceiling as an investment does. Frequently forgotten when adding up.
A unit linked insurance plan: a policy mixing cover with market-linked investment, with its own charges, lock-in and conditions.
A voluntary contribution to the provident fund over and above the statutory one, through the same payroll mechanism and at the same rate.
Commonly asked about ELSS and tax saving
Should I be in the old regime or the new one?
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If I am in the new regime, is an ELSS pointless?
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My SIP is three years old. Can I redeem all of it?
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Can I take the money out early in an emergency?
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How much tax does investing actually save me?
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What should I do when the lock-in ends?
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How many ELSS schemes should I hold?
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Is PPF better than ELSS?
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Does my provident fund already count?
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I have left it until March. What now?
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