{"id":54567,"date":"2026-08-11T10:36:15","date_gmt":"2026-08-11T05:06:15","guid":{"rendered":"https:\/\/www.tatacapital.com\/blog\/?p=54567"},"modified":"2026-08-11T10:36:24","modified_gmt":"2026-08-11T05:06:24","slug":"elss-funds","status":"publish","type":"post","link":"https:\/\/www.tatacapital.com\/blog\/wealth-services\/elss-funds\/","title":{"rendered":"ELSS Mutual Funds: How do they help you save tax?"},"content":{"rendered":"\n

<\/p>\n\n\n\n

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.<\/em><\/strong><\/p>\n\n\n\n

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.<\/p>\n\n\n\n

ELSS mutual funds\u2019 full form is Equity Linked Savings Scheme. The equity mutual fund<\/a> 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.<\/p>\n\n\n\n

What is ELSS?<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

Also Read – Old vs New Tax Regime Explained<\/a><\/p>\n\n\n\n

Does ELSS still save tax in 2026?<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

How ELSS saves tax: A worked example<\/strong><\/h2>\n\n\n\n

Here\u2019s an example to understand how an ELSS mutual fund saves taxes.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Old tax regime<\/strong><\/td>New tax regime<\/strong><\/td><\/tr>
ELSS investment:<\/strong> Rs. 1,50,000<\/td>ELSS investment:<\/strong> Rs. 1,50,000<\/td><\/tr>
Section 123 deduction:<\/strong> Rs. 1,50,000<\/td>Deduction:<\/strong> NIL<\/td><\/tr>
Tax slab:<\/strong> 30%<\/td>Tax slab:<\/strong> 30%<\/td><\/tr>
Tax saved:<\/strong> Rs. 45,000<\/td>Tax saved:<\/strong> 0<\/td><\/tr>
Health and education cess saving<\/strong>: Rs. 1,800 (4% of 45,000)<\/td>Health and education cess saving<\/strong>:0<\/td><\/tr>
Total tax saving:<\/strong> Rs. 46,800<\/td>Total tax saving:<\/strong> Rs. 0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

How much tax do you pay when you exit ELSS?<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

Read More – How to Save Income Tax in India<\/a><\/p>\n\n\n\n

What is the ELSS lock-in period of 3 years?<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

What are the ELSS vs other Section 80C options?<\/strong><\/h2>\n\n\n\n

<\/p>\n\n\n\n

Feature<\/strong><\/td>Equity Linked Savings Scheme (ELSS)<\/strong><\/td>Public Provident Fund (PPF)<\/strong><\/td>Employees\u2019 Provident Fund (EPF)<\/strong><\/td>5-Year tax-saving Fixed Deposit<\/strong><\/td>National Savings Certificate (NSC)<\/strong><\/td><\/tr>
Lock-in<\/td>3 years<\/td>15 years<\/td>Till retirement\/withdrawal rules<\/td>5 years<\/td>5 years<\/td><\/tr>
Returns<\/td>Market-linked<\/td>Government-backed, fixed<\/td>Government-declared<\/td>Fixed<\/td>Fixed<\/td><\/tr>
Risk<\/td>High – capital value can rise or fall<\/td>Very low<\/td>Very low<\/td>Low<\/td>Low<\/td><\/tr>
Capital safety<\/td>Not guaranteed<\/td>Guaranteed by the government<\/td>Backed by EPF rules<\/td>Principal protected<\/td>Principal protected<\/td><\/tr>
Taxation on exit<\/td>LTCG tax applies as per prevailing rules<\/td>Generally tax-free<\/td>Generally tax-free if conditions are met<\/td>Interest is taxable<\/td>Interest is taxable<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Who should consider ELSS – and who should not?<\/strong><\/h2>\n\n\n\n

An ELSS mutual fund may be suitable for:<\/p>\n\n\n\n

    \n
  • Taxpayers who opted for the old tax regime.<\/li>\n\n\n\n
  • Investors with a moderate-to-high risk appetite.<\/li>\n\n\n\n
  • People who can stay invested for more than 3 years.<\/li>\n<\/ul>\n\n\n\n

    An ELSS mutual fund may NOT be suitable for:<\/p>\n\n\n\n

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

      How to invest in ELSS?<\/strong><\/h2>\n\n\n\n

      After understanding ELSS mutual funds\u2019 meaning, you need to learn how to invest in it. Here\u2019s the required step-by-step process:<\/p>\n\n\n\n

        \n
      1. Complete your KYC and choose the best ELSS mutual fund, suiting your financial goals and risk appetite.<\/li>\n\n\n\n
      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.<\/li>\n\n\n\n
      3. Track your investment using the Moneyfy ELSS Calculator and compare options on the Moneyfy Tax Saver (ELSS) Funds page before investing.<\/li>\n<\/ol>\n\n\n\n

        Conclusion<\/strong><\/h2>\n\n\n\n

        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\u2019t choose ELSS only for tax benefits, as its returns after the 3-year lock-in period still attract taxes at 12.5%.<\/p>\n\n\n\n

        <\/p>\n","protected":false},"excerpt":{"rendered":"

        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 […]<\/p>\n","protected":false},"author":1,"featured_media":54569,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[37],"tags":[],"yoast_head":"\nELSS mutual funds: Tax benefits, lock-in & how it works<\/title>\n<meta name=\"description\" content=\"ELSS funds offer a deduction of up to Rs 1.5 lakh - but only under the old tax regime. 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