Lesser-known facts about ELSS

Equity-Linked Saving Scheme (ELSS) is one of the most popular tools for tax saving. In fact, most of the financial advisors suggest people to go for ELSS as they provide capital appreciation apart from tax saving. As we all know, ELSS qualifies for the tax deduction under section 80C of Income Tax Act, 1961. However, being an equity-oriented mutual fund, any redemption post lock-in period would be considered as Long-Term Capital Gains (LTCG) and taxed at the rate of 10 per cent with gains up to Rs 1 lakh exempted. Having said that, following are the some of the lesser-known facts about ELSS:

Governance
All the ELSS, whether it may be open-ended or closed-ended, are directly governed by the finance ministry. Unlike other mutual funds, they are not governed by Securities and Exchange Board of India (SEBI). The decisions regarding where and how ELSS can invest money is taken by the finance ministry.

Death of unit holder
In case of the death of a unit holder, their nominees get funds on immediate basis if it is a non-ELSS fund. However, in case of ELSS fund, the nominees get the units or its corresponding value, only after one-year from the date of allotment of each unit.

Arbitrage
ELSS is only allowed to invest in equities and bonds that can be converted into shares. The fund cannot engage itself into arbitrage activity. This is what most of the non-ELSS funds usually do for containing the risk.

Portfolio
At all times, 80 per cent of the ELSS fund’s asset should be in equity and equity-related instruments. To cope with the redemption, they can invest the remaining 20 per cent in cash or money market instruments. The equity part of the portfolio can be managed at the discretion of the fund manager. This means that they are free to invest across market capitalisation, similar to a multi-cap fund.