What are ELSS mutual funds? A beginner-friendly guide

If you’re looking for an investment that aims to grow your money while also offering tax-saving benefits under the old tax regime, Equity-Linked Savings Schemes (ELSS) could be a smart choice. These are equity mutual funds that offer tax benefits under Section 80C and, unlike traditional tax-saving options, give your money a shot at market-linked growth.

In this guide, we’ll explain what ELSS funds (also known as tax-saving funds) are, how they work, their benefits, risks and where they fit in your portfolio.

At Value Research, we’ve been tracking mutual funds for decades, helping people like you choose funds with confidence.

What is an ELSS mutual fund?

An ELSS fund is an equity mutual fund that allows you to claim tax deductions of up to Rs 1.5 lakh a year under Section 80C of the Income Tax Act (old tax regime).

SEBI rules require ELSS funds to invest at least 80 per cent of their assets in equity and equity-related instruments.

What makes ELSS unique is its three-year lock-in period — the shortest lock-in among all tax-saving investments like PPF or Public Provident Fund (15 years) and NSC or National Savings Certificate (five years).

By investing in an ELSS fund, you get exposure to a mix of large-, mid- and small-cap stocks while saving tax.

How do ELSS funds work?

When you invest in an ELSS fund, your money is pooled with that of other investors. The fund manager builds a diversified portfolio across large, mid and small companies, aiming to grow your investment over time.

However, do remember that you can’t withdraw your money for three years from the date of each investment (each SIP instalment has its own lock-in).

ELSS and the new tax regime

If you opt for the new tax regime, ELSS funds no longer provide a tax deduction benefit. The new regime offers lower tax rates but removes most exemptions and deductions, including those under Section 80C.

What this means for you

While ELSS funds don’t offer tax savings under the new regime, they can still be part of your portfolio purely for long-term wealth creation. They remain equity funds at heart — suitable for building wealth if you can stay invested for at least three years (and ideally much longer).

Why consider ELSS funds?

• Save tax while aiming for higher returns: ELSS funds help you reduce your taxable income under the old tax regime and build wealth over time.
• Shortest lock-in among tax-saving options: The three-year lock-in promotes investing discipline but also gives you flexibility compared to other tax-saving schemes.
• Strong long-term performance: Several top-performing ELSS mutual funds have delivered 19-23 per cent SIP returns over the last 10 years, rewarding long-term investors.

Where do ELSS funds fit in your portfolio?

ELSS funds are ideal if:

• You are in the old tax regime and want to combine tax saving with long-term wealth creation
• You can stay invested for at least three years (ideally longer for best results)
• You want to invest via SIPs to spread contributions across the year

They work well as part of your core equity portfolio, especially when planning your 80C deductions.

ELSS funds taxation

• Tax benefit: You can claim a tax deduction of up to Rs 1.5 lakh per financial year on ELSS investments under Section 80C of the old tax regime.
• On exit: After completing the mandatory three-year lock-in, long-term capital gains (LTCG) on ELSS are taxed at 12.5 per cent for gains beyond Rs 1.25 lakh per annum. This means any gains up to Rs 1.25 lakh for the financial year are tax-free.

Things to keep in mind

• Tax benefit limited to old tax regime: ELSS offers tax deductions under Section 80C only if you’ve chosen the old tax regime. There’s no tax-saving advantage if you’re under the new regime.
• Market risk: ELSS funds invest in equities — returns can fluctuate with market conditions.
• Lock-in period: You can’t access your money before three years, so ensure you don’t need the funds in the short term.

FAQs on ELSS funds

Can I withdraw ELSS before three years?

No. ELSS funds have a mandatory three-year lock-in period. You can only redeem after this period.

Can I continue holding my ELSS fund after three years?

Yes. After the three-year lock-in, you’re free to redeem your ELSS units at any time. But if you don’t need the money, you can stay invested and let your money continue to grow. There’s no upper limit on how long you can hold the fund.

Is ELSS better than PPF?

ELSS offers higher return potential as it invests in equities, but also comes with higher risk. PPF provides fixed returns but with a longer lock-in.

Also read:

What are large-cap funds?

How mutual funds work?

What are equity mutual funds?

What are debt mutual funds?

What are mid-cap funds?

What are small-cap funds?

This article was originally published on July 01, 2025.