ELSS tax saving mutual funds: how they work
Written and reviewed by Omm · Last reviewed · General information, not investment advice
ELSS (Equity Linked Savings Scheme) is a category of equity mutual fund that offers a tax deduction in exchange for a three-year lock-in.
The main rules
- Equity exposure: at least 80% of the money is invested in equities.
- Lock-in: each investment is locked for three years from the date of purchase. This is the shortest lock-in among tax-saving investments in India.
- Tax deduction: investments of up to ₹1.5 lakh a year can be deducted from taxable income under Section 123 of the Income-tax Act, 2025 (formerly Section 80C; the new Act applies from 1 April 2026), but only under the old tax regime. The new regime does not allow this deduction. Tax rules are rewritten from time to time, so check the current position before relying on it.
- Tax on gains: when you redeem after the lock-in, gains are taxed like those of other equity funds. See mutual fund taxation.
How a SIP in ELSS works
If you invest through a monthly SIP, every instalment has its own lock-in. The instalment from January this year can be redeemed three years later, while the one from December can be redeemed three years after that. So, by the end of the first year, none of the money is accessible.
Things to think about
- It is still an equity fund. The tax deduction does not protect you from losses. Choose an ELSS for its investment merit, not only for the deduction.
- The lock-in removes the option to sell in a downturn, which also stops you panic-selling.
- Choose a plan and option like any other fund: Direct vs Regular, and Growth rather than IDCW for long-term compounding.
- Compare within the category. On this site, choose “ELSS (Tax Saver)” in the Category filter of the screener to compare ELSS funds with each other.
ELSS is one way to save tax. Whether it fits you depends on your tax regime, your other deductions and your risk tolerance.