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ELSS Mutual Funds: How do they help you save tax?

ELSS Mutual Funds: How do they help you save tax?

ELSS mutual funds, meaning Equity Linked Savings Schemes, are equity mutual funds that allocate at least 80% of their assets to stocks. They have the potential for long-term wealth creation. Moreover, ELSS mutual funds offer tax deductions of up to Rs. 1.5 lakh per financial year under Section 80C of the Income Tax Act, provided you opt for the old tax regime. There is a 3-year lock-in period, which is the shortest among all other tax-saving options.

ELSS mutual funds allocate a major part of the money into equity and equity-related instruments and offer tax-saving benefits under Section 80C of the Income Tax Act.

ELSS mutual funds’ full form is Equity Linked Savings Scheme. The equity mutual fund offers a deduction of up to Rs. 1.5 lakh under Section 80C and has a 3-year lock-in period. However, this tax benefit is available only under the old tax regime.

What is ELSS?

If you are wondering what an ELSS mutual fund is, it is an Equity Linked Savings Scheme. As per SEBI guidelines, it requires an allocation of at least 80% in equity and equity-related instruments.

Also Read – Old vs New Tax Regime Explained

Does ELSS still save tax in 2026?

Yes, but only for some taxpayers. The ELSS tax deduction is available only under the old tax regime. However, since the new tax regime is now the default, many taxpayers cannot claim this benefit. Additionally, from 1 April 2026, under the Income Tax Act, 2025, the old Section 80C has been renumbered as Section 123 (read with Schedule XV). This does not change the deduction limit of Rs. 1.5 lakh, but the section number has changed.

How ELSS saves tax: A worked example

Here’s an example to understand how an ELSS mutual fund saves taxes.

Old tax regimeNew tax regime
ELSS investment: Rs. 1,50,000ELSS investment: Rs. 1,50,000
Section 123 deduction: Rs. 1,50,000Deduction: NIL
Tax slab: 30%Tax slab: 30%
Tax saved: Rs. 45,000Tax saved: 0
Health and education cess saving: Rs. 1,800 (4% of 45,000)Health and education cess saving:0
Total tax saving: Rs. 46,800Total tax saving: Rs. 0

How much tax do you pay when you exit ELSS?

ELSS returns are not tax-free upon redemption. After the 3-year lock-in period, all gains are Long-Term Capital Gains (LTCG). As of FY 2026-2027, the LTCG taxation rate is 12.5% on gains above Rs. 1.25 lakh in a financial year. This Rs. 1.25 lakh exemption applies to your total equity gains, not each fund. Thus, it is advisable that you spread redemptions across different financial years to help keep gains within the exemption limit.

Read More – How to Save Income Tax in India

What is the ELSS lock-in period of 3 years?

ELSS has a 3-year lock-in period. However, if you invest through an SIP, each installment has its own 3-year lock-in from its investment date. So, if your first installment was made in January 2026 and the second in July 2026, you can redeem the first after January 2029 and the second after July 2029.

What are the ELSS vs other Section 80C options?

FeatureEquity Linked Savings Scheme (ELSS)Public Provident Fund (PPF)Employees’ Provident Fund (EPF)5-Year tax-saving Fixed DepositNational Savings Certificate (NSC)
Lock-in3 years15 yearsTill retirement/withdrawal rules5 years5 years
ReturnsMarket-linkedGovernment-backed, fixedGovernment-declaredFixedFixed
RiskHigh – capital value can rise or fallVery lowVery lowLowLow
Capital safetyNot guaranteedGuaranteed by the governmentBacked by EPF rulesPrincipal protectedPrincipal protected
Taxation on exitLTCG tax applies as per prevailing rulesGenerally tax-freeGenerally tax-free if conditions are metInterest is taxableInterest is taxable

Who should consider ELSS – and who should not?

An ELSS mutual fund may be suitable for:

  • Taxpayers who opted for the old tax regime.
  • Investors with a moderate-to-high risk appetite.
  • People who can stay invested for more than 3 years.

An ELSS mutual fund may NOT be suitable for:

  • Anyone who has opted for the new tax regime.
  • Anyone who may need the money within 3 years, since there is no premature withdrawal.
  • Anyone investing only to save tax without considering their overall equity allocation and the associated risk.

How to invest in ELSS?

After understanding ELSS mutual funds’ meaning, you need to learn how to invest in it. Here’s the required step-by-step process:

  1. Complete your KYC and choose the best ELSS mutual fund, suiting your financial goals and risk appetite.
  2. Invest through an SIP or lump sum. Most ELSS funds let you start with Rs. 500. A year-round SIP reduces market timing risk compared with making a lump-sum investment just before the tax-saving deadline.
  3. Track your investment using the Moneyfy ELSS Calculator and compare options on the Moneyfy Tax Saver (ELSS) Funds page before investing.

Conclusion

ELSS can help you build long-term wealth while offering tax savings under Section 123 of the Income Tax Act. Before investing, check your tax regime, risk appetite, investment horizon, and overall financial goals. Don’t choose ELSS only for tax benefits, as its returns after the 3-year lock-in period still attract taxes at 12.5%.

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FAQs

How much tax can I save with ELSS?

The old tax regime allows a deduction of up to Rs. 1.5 lakh under Section 80C every financial year. This reduces your taxable income and the resulting payable taxes.

Can I claim ELSS under the new tax regime?

No. There are no applicable deductions for ELSS mutual funds under the new tax regime.

Is ELSS tax-free on redemption?

No. ELSS returns are subject to Long-Term Capital Gains (LTCG) as per the tax rules applicable at the time of redemption.

How does the 3-year lock-in work for an ELSS SIP?

The 3-year lock-in period applies to every ELSS installment individually. So, if you make an SIP investment in July 2026, you can only redeem it after July 2029.

Is ELSS still valid after the Income Tax Act 2025?

The Income Tax Act 2025 has renumbered Section 80C as Section 123. However, deductions on ELSS mutual funds still apply under the old tax regime.
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