“Unlike the Public Provident Fund (PPF), which has a 15-year lock-in and offers fixed returns (currently around 7%-8%), ELSS funds have a much shorter lock-in of just 3 years and historically deliver average annualized returns of 10%-12%, higher in some cases,” said Adhil Shetty, CEO of Bankbazaar.com.
“Since ELSS returns are market-linked and volatile in the short term, investing through SIP is wise. SIPs help mitigate market timing risk by averaging purchase costs during market highs and lows,” he added.
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The investment options available under Section 80C are ELSS funds, NPS, ULIP, PPF, EPF, FD, SSY, and NSC. The ELSS schemes have a lock-in period of three years, whereas any other options available under Section 80C have a longer lock-in period.
An NPS subscriber can select multiple asset classes under a single pension fund manager. Up to 50 years of age, the maximum permitted equity investment is 75% of the total asset allocation. For those 51 years and above, the maximum permitted equity investment differs, according to a document on NPS available on the NPS Trust website.
“Compared to the National Pension Scheme (NPS), which locks in investments until the age of 60 and partially taxes withdrawals at maturity, ELSS provides greater liquidity and simpler taxation. ULIPs, on the other hand, combine insurance and investment but have higher charges and longer lock-ins, making ELSS preferable for those focused on wealth creation rather than dual benefits,” Shetty added.
The introduction of the new income tax regime has impacted the appeal of Equity Linked Savings Schemes (ELSS) or tax-saving schemes. Under the new tax regime, investors don’t have the tax-saving benefit previously offered under Section 80C, and has reduced the investors’ interest in investing in ELSS mutual funds.
The finance minister made changes to the income tax slabs under the new tax regime in Budget 2024. The new tax regime does not allow deduction of common deductions such as Section 80C deduction up to Rs 1.5 lakh for specified investments and expenditures. Any individual opting for the new tax regime can now claim only two deductions – the Standard deduction of Rs 50,000 from salary/pension income and Section 80CCD (2) for the employer’s contribution to the employee’s NPS account.
In the financial year 2025 so far, according to the monthly data released by the Association of Mutual Funds in India, ELSS funds have witnessed an outflow of Rs 2,030 crore in the first six months. In FY25 so far (April to February), the ELSS funds have received an inflow of Rs 570 crore.
According to the expert, “Switching to the new tax regime eliminates deductions under Section 80C, including the Rs 1.5 lakh tax benefit that makes ELSS attractive in the old regime. Without the tax-saving incentive, ELSS investments lose their primary advantage. However, they can still remain beneficial as part of an investor’s equity portfolio. The three-year lock-in is relatively short, and ELSS continues to offer long-term capital appreciation potential due to its equity exposure.”
“For existing ELSS investors, there’s no need to exit prematurely when switching to the new tax regime. These funds can continue to compound wealth efficiently. Additionally, ELSS investments may still be partially tax-efficient since long-term capital gains (LTCG) up to Rs 1 lakh per year are tax-free. This makes ELSS a good option for long-term wealth creation,” he added.
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With the new financial year about to start, it is the perfect time to plan how to save your taxes. While recommending the strategy to save taxes for the new financial year, the expert mentions that allocation to ELSS schemes should depend on the investor’s tax regime and overall equity exposure and for those staying in the old tax regime, ELSS remains one of the most attractive Section 80C options due to its short lock-in and strong historical returns.
“The investors with moderate risk tolerance could allocate around 20%-25% of their tax-saving portfolio to ELSS. However, those shifting to the new tax regime may want to reduce their ELSS allocation, especially if their primary motivation was tax saving. Instead, they could explore other equity options such as index funds,” the expert further recommends.
Currently, 360 One Mutual Fund and Navi Mutual Fund offer passive funds in this category. Excluding the passive funds, there are around 40 active funds in the category. The ELSS funds, including active and passive, have offered an average return of around 15.25%.
SBI Long Term Equity Fund, the oldest ELSS fund and an active fund, has offered the highest return in the last three years of around 24.22%, followed by Motilal Oswal ELSS Tax Saver Fund, which gave a 23.01% return in the same time frame.
360 ONE ELSS Tax Saver Nifty 50 Index Fund and Navi ELSS Tax Saver Nifty 50 Index Fund are the two passive ELSS funds. Both the funds have completed three years of existence in the market.
With around 40 active funds in the category and two new passive funds, are you wondering which one to choose? Should one focus on actively managed ELSS funds or opt for an ELSS index fund to reduce fund manager dependency?
According to Shetty, the choice between actively managed and passive ELSS funds depends on an investor’s preference for cost, simplicity and performance and the actively managed ELSS funds aim to deliver returns above the benchmark index by leveraging fund manager expertise, plus they come with higher expense ratios (typically 1%-1.5%).
“Historically, some active ELSS funds have outperformed their benchmarks. On the other hand, passive ELSS funds aim to track an index at a significantly lower cost (0.1%-0.3% expense ratio). Passive funds eliminate fund manager dependency and reduce costs, but they also limit the potential for outperformance. Given that the Indian equity market is becoming more efficient,” he added.
He further recommends that for beginners or cost-conscious investors, passive ELSS funds could be a good option. Meanwhile, experienced investors who actively track fund performance might prefer active ELSS funds with a consistent record of outperforming the market, he adds.
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What is an ELSS mutual fund?
ELSS or tax-saving schemes help investors to save income tax under Section 80C of the IT Act. One can invest a maximum of Rs 1.5 lakh in a financial year and claim deductions on investments in a financial year. ELSS funds invest in stocks and carry high risk. These schemes have a mandatory lock-in period of three years. This helps investors, especially new and inexperienced ones, to learn about the nature of equity markets and the volatility associated with them.
Note, the above exercise is not a recommendation. One should not make investment or redemption decisions based on the above exercise. One should always consider risk appetite, investment horizon, and goal before making investment decisions.
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