Equity Linked Savings Scheme, or ELSS, are equity funds which invest a major portion of their corpus into equity or equity-related instruments. 

ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act. 

An investor can opt for Dividend Payout or Growth option. Many reputed fund houses such as HDFC Mutual Fund have paid out between Rs.5 to Rs.7 per unit in their HDFC Tax Saver Dividend Option scheme, giving investors a return of around 10%. However, investors are advised that with effect from 1st April 2020, dividends are taxable in the hands of the recipient. 

These funds come with a mandatory lock-in period of 3 years in order to get tax-free returns. However, after the re-introduction of LTCG tax in the budget, returns from the investments in ELSS funds would be taxed. Long-term capital gains from equity mutual funds above Rs 1 lakh would be taxed at 10 percent without any indexation benefit. 

Investors typically make their tax-saving investments in the last three months of the financial year (January-March), known as tax-saving season.

We would suggest that if you are opting to invest in this excellent tax saving instrument, you should do so early in the financial year when the Net Asset Value is generally lower. 

To sum up, ELSS is an excellent tax saving instrument in which one must invest. 

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- Melvyn Pinto