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Although all equity funds exempt you from paying long-term capital gains tax of 10.4% up to an amount of ₹1 lakh (apart from grandfathering clause), there is one breed of equity funds that give you tax deduction benefits at the time of making an investment. These are equity-linked saving schemes (ELSS), more popularly known as tax-saving mutual fund (MF) schemes.
An ELSS gives you tax deduction benefit of up to ₹1.5 lakh under Section 80C. This is the only pure equity investment vehicle that offers Section 80C deduction benefits.
The only catch here is it comes with a 3-year lock-in. Other equity funds don’t carry a lock-in. Remember, the lock-in also applies to your systematic investment plans (SIP); every monthly instalment you make in an ELSS is subject to a 3-year lock-in.
Other than deduction benefits and the lock-in, an ELSS is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors and market capitalisations. When investing in ELSS, care should be taken to not invest in a new scheme every year to save taxes. One ELSS in the portfolio—in which you keep topping up every year—is more than enough.
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