Has the new tax regime hurt ELSS returns?

Summary: The growing preference for the new tax regime means Section 80C incentives are off the table for mutual fund investors who hold ELSS or tax-saving funds in their portfolio. However, has this impacted the category’s performance? Let’s find out.

With the new tax regime becoming the default option, many taxpayers can rejoice, since it offers lower rates and a higher standard deduction. However, the downside of the new regime is the absence of deductions and exemptions on various investments, including ELSS funds.

ELSS (equity-linked savings scheme) funds, popularly known as tax-saving funds, are a type of diversified equity scheme. Under the old tax regime, these funds qualified for a deduction of up to Rs 1.5 lakh under Section 80C. They also come with a three-year lock-in period.

As an increasing number of taxpayers gravitate towards the new regime, the question arises: Have ELSS funds lost their allure? And more importantly, has this led to a fall in their returns?

We assess the category’s long-term performance and what investors should consider before making a decision.

How have ELSS funds fared in the past?

To understand how the category has performed historically, we decided to compare it with flexi-cap funds (since they too invest across the market) and its benchmark, the Nifty 500 TRI.

To do so, we considered the funds’ five-year rolling returns from January 2018 to February 2026. We also took into account the percentage of times ELSS funds outperformed flexi-cap funds and the broader market.

The above data proves that ELSS funds have been on a strong footing. While they delivered nearly identical returns to flexi-cap funds, they also beat their benchmark by a decent margin. What’s more, the category outperformed flexi caps in marginally more than half of all five-year periods and the Nifty 500 TRI in nearly two-thirds of such periods.

The bottom line

Performance of a fund depends on factors such as market movements and the management’s call. What it doesn’t depend on is taxation.

Suggested read: New tax regime is here. Time to stop your ELSS investments?

Given the impressive performance of ELSS funds, it can be safely concluded that the removal of Section 80C benefits has had no impact on their returns.

So, should investors under the new tax regime still consider ELSS funds? Though the category has been on par with flexi-cap funds, it comes with a lock-in period, something that may not suit investors seeking liquidity. However, if you have opted for the old regime and are comfortable with the three-year lock-in period, ELSS funds still hold merit.

Which mutual funds should you invest in then?

If you want funds chosen for performance and discipline, not tax confusion, the Value Research Advisor App helps you pick the right ones. Better decisions today can mean stronger long-term returns tomorrow.

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