What are ELSS Funds?

What Is an ELSS Mutual Fund?

Equity-linked savings funds are equity-oriented mutual funds that invest a significant portion of their corpus in equities or equity-related instruments. They are often referred to as tax-saving funds because investments of up to ₹1.5 lakh per financial year qualify for a deduction under Section 80C of the Income Tax Act.

Like the name implies, an ELSS fund is an equity-based scheme with a mandatory three-year lock-in period. The income received after three years will be classified as Long-Term Capital Gains (LTCG). For redemptions on or after 23 July 2024, long-term capital gains above ₹1.25 lakh in a financial year are taxed at 12.5% plus applicable cess.

ELSS funds are suitable for:

• Salaried taxpayers and investors looking to save tax while investing long-term.
• Investors with a moderate-to-high risk appetite who are comfortable with market-linked returns.
• First-time equity investors, especially those starting small through SIPs.
• Long-term wealth builders with a horizon of at least three years or more.

Best ELSS Mutual Funds in India

The following lists some of the best ELSS funds and their performance indicators. It is important to note that CRISIL ratings are not publicly available in all funds, and as such, some of the entries may lack this data. Investment decisions should always be made based on up-to-date data.

Note: AMFI and CRISIL data as of 13 Oct 2025 (based on the latest available NAV and fund factsheet). Data is subject to change.

Key Benefits of ELSS Funds

The main advantages of ELSS funds that every investor must be aware of are as follows:

• Possible Increased Returns: Since ELSS is an equity-heavy investment, it can provide better returns in the long term than debt or fixed income 80C options.
• Minimum Lock-in Under Section 80C Options: ELSS has the shortest lock-in period of 3 years compared to other tax-saving options. Public Provident Fund (PPF) has a 15-year maturity, National Savings Certificate (NSC) has a 5-year lock-in, and the National Pension System (NPS) remains locked in until the investor reaches age 60.
• Compounding and Habit Formation: The lock-in period encourages discipline; even small SIPs can grow into a substantial investment over time.
• Investment Flexibility: ELSS funds carry no limit on investment, but the tax deduction provided in Section 80C is limited to ₹1.5 lakh per annum. Investors can invest either as a lump sum or through a Systematic Investment Plan (SIP), depending on their convenience and risk preference.

How Do ELSS Funds Work?

To make sound investment decisions, knowing how ELSS funds operate is important. The steps to be followed are as follows:

1. Select an ELSS Fund:

   • ELSS (Equity Linked Savings Scheme) is a type of equity mutual fund where a person may invest in the stock market, which is also tax advantaged.
   • These funds aim for long-term wealth creation and have a mandatory three-year lock-in period, the shortest among tax-saving options.

2. Understand the Investment Focus:

   • ELSS funds invest mainly in equity shares of publicly listed companies.
   • They diversify the portfolio by including businesses in various sectors and industries that reduce the risks associated with any particular sector.

3. Check Market Capitalisation Exposure:

   • Fund managers allocate investments across large-cap, mid-cap, and small-cap companies.
   • This combination enables the fund to strike a balance (large-cap) and growth possibility (mid and small-cap) of increased risk-adjusted returns.

4. The role of Fund Manager:

   • Professional fund managers do thorough research, such as market trends, the company's fundamentals, and industry analysis.
   • They aim to achieve a diversified, risk-adjusted portfolio to maximise long-term returns.

Why Invest in ELSS Funds?

Equity-linked savings schemes (ELSS) offer investors a balanced way to save tax while participating in equity market growth. Here’s how these funds matter for investors:

1. Dual Benefit of Tax Savings and Wealth Growth

   Investing in ELSS allows a tax deduction of up to ₹1.5 lakh each financial year under Section 80C of the Income Tax Act. For those in the highest tax bracket, this can reduce tax liability by up to ₹46,800.

   Aspect	Details
   Section 80C Deduction Limit	₹1.5 lakh per financial year
   Maximum Tax Saving (Approx.)	₹46,800 for 30% tax bracket
   Growth Source	Equity-linked long-term compounding

2. Shortest Lock-in Period Among Tax-Saving Options

   ELSS funds have a lock-in period of three years, which is shorter than most other tax-saving schemes. This allows investors to redeem or continue their investment sooner, depending on their financial goals.

   Instrument	Safety / Risk	Lock-in / Tenure	Returns / Rate (% p.a.)	Tax-Free Gains
   SCSS (Senior Citizens Savings Scheme)	Low Risk	5 years	8.20	No
   NSC (National Savings Certificate)	Highest Safety	5 years	7.70	No
   PPF (Public Provident Fund)	Highest Safety	15 years	7.10	Yes
   Bank FD (Tax-Saving)	Low Risk	5 years	~6.20 (varies by bank)	No
   ELSS (Equity Linked Savings Scheme)	High Risk	3 years	Market Linked	No
   Life Insurance Premiums	Moderate Risk	Minimum 5 years	Variable	Yes
   NPS (National Pension System)	Moderate Risk	Till age 60	Variable	Partially
   EPF (Employee Provident Fund)	Low Risk	Till retirement	8.25	Yes
   Sukanya Samriddhi Yojana (SSY)	Low Risk	15 years	8.20	Yes

   Note: Interest rates for SCSS, NSC, PPF, and SSY are as per Government of India notifications for October–December 2025 (Q3 FY 2025-26). These rates are reviewed quarterly.

   ELSS returns are market-linked and may vary with equity market performance. Historical returns should not be considered an assurance of future performance.

3. Flexible Investment Options

   ELSS offers two convenient modes of investment:

   • Lump Sum: Suitable for investors who wish to invest a larger amount at once.
     
     
   • Systematic Investment Plan (SIP): Enables periodic contributions, builds discipline, and helps average purchase cost across market cycles.

4. Comparative Returns of Major Tax-Saving Options

   The table below summarises the typical/declared annual return expectations for various major tax-saving investment options in India. Note that for market-linked instruments, these are historical or expected averages and not guaranteed, while for fixed-rate schemes, these are the most recently declared interest rates.

   Instrument	Expected Annual Return
   ELSS Funds	10–12% (market-linked)
   PPF	Around 7.10%
   NSC	Around 7.70%
   Bank Tax-Saving FD	Around 6–7%
   EPF	Around 8.25%

   Note: Returns for government-backed instruments are fixed for the current quarter, while ELSS returns depend on market conditions.

5. Cost-Effective Investment Structure

   Most ELSS funds do not charge an entry load; no exit load applies after the mandatory three-year period. This makes them an efficient choice among Section 80C instruments when considering costs and long-term growth potential.

   Investment Type	Entry Load	Exit Load
   ELSS Funds	No	No
   Regular Mutual Funds	Sometimes	Yes (if withdrawn early)
   Bank FDs	No	No
   ULIPs	Yes	Yes

6. No Upper Limit on Investment

   While the tax deduction under Section 80C is capped at ₹1.5 lakh, there is no maximum investment limit in ELSS funds. Investors can allocate additional amounts to build wealth through long-term equity exposure, even though the extra portion does not qualify for a tax deduction.

7. Long-Term Wealth Creation Through Compounding

   Regular investing in ELSS through SIPs allows compounding to work effectively over time. Staying invested for longer durations can significantly increase overall returns.

   Year	Total Investment (₹)	Wealth Gained (₹)	Total Value (₹)
   1	60,000	3,600	63,600
   5	3,00,000	1,12,716	4,12,716
   10	6,00,000	5,32,749	11,32,749

   (Assuming ₹5,000 monthly SIP with 12% annualised return)

How to Start with ELSS Funds in India?

Starting your investment journey in ELSS (Equity Linked Savings Scheme) funds is straightforward and can be done online or offline. Here’s a step-by-step guide to help you get started:

1. Complete Your KYC

   Before investing in any mutual fund, ensure you are a mutual fund KYC-compliant. You can complete your e-KYC online using your PAN, Aadhaar, and bank details through the official website of a mutual fund company (AMC), a Registrar and Transfer Agent (RTA) such as CAMS or KFintech, or an authorised investment platform. The process involves online verification, including photo and document validation.

2. Choose an Investment Platform

   You can invest in ELSS either:

   • Online: via AMC websites, RTAs (like CAMS or KFintech), or online mutual fund platforms. These allow you to select between Regular and Direct plans. Check whether the platform offers your preferred plan before proceeding.
     
     
   • Offline: by contacting a registered mutual fund distributor who will assist in filling out forms, submitting cheques, and completing KYC (if pending).

3. Select the Right ELSS Scheme

   Compare ELSS funds based on past performance, benchmark comparison, fund manager experience, expense ratio, and portfolio diversification. Prefer schemes that have consistently outperformed category averages and benchmarks over multiple timeframes.

4. Decide the Investment Mode

   You can invest either as a lump sum (one-time investment) or through a Systematic Investment Plan (SIP). SIPs are generally preferred since they promote disciplined investing and help average out market volatility over time.

5. Register and Make the Payment

   Once registered on your chosen platform, log in, select your ELSS scheme, choose the plan type (Direct or Regular) and option (Growth or IDCW), and pay through your linked bank account using net banking or UPI.

6. Track and Review Your Investment

   After investing, monitor the performance of your ELSS fund regularly using your AMC or distributor’s online dashboard. As ELSS comes with a mandatory 3-year lock-in period, aim to stay invested for at least 3–5 years to fully benefit from compounding and long-term capital growth.

Factors to Consider Before Investing in ELSS Funds

ELSS (Equity Linked Savings Scheme) may be a rewarding investment. However, one should consider some major factors before investing. Your investment is made according to your financial objectives, risky behaviour, and tax strategies.

1. Investment Horizon and Lock-in Period

   • ELSS is the shortest lock-in period compared to other tax-saving instruments, with a mandatory lock-in period of 3 years.
   • Investors must be ready to remain invested for at least 3-5 years to get the most returns in the long run and to avoid market fluctuations.

2. Risk Appetite

   • ELSS is an equity-based fund; hence, it is not secured to make any returns.
   • Demand for risk: ELSS investments should be evaluated carefully, and only people with a medium to high-risk appetite should invest in these.

3. Fund Performance and Track Record

   • Examine the fund's past performance; however, check upon the fund manager's expertise, investment strategy, and consistency.
   • Compare returns with the benchmark indexes and other ELSS funds to make a knowledgeable decision.

4. Expense Ratio and Charges

   • ELSS funds incur management expenses (expense ratio), which affect net returns.
   • Seek a low expense ratio and a consistent fund-management track record.

5. Portfolio Diversification

   • Ensure the allocation of the fund into large-cap stocks, mid-cap stocks, and small-cap stocks, and industry diversification.
   • Diversifying a fund will minimise the industry-specific risks and increase the potential for growth in the long run.

6. Tax Benefits and Goals Alignment

   • ELSS is tax-deductible in Section 80C to the extent of 1.5 lakh.
   • Ensure the investment is consistent with your overall financial and tax-planning objectives.

7. Taxation on Returns

   While ELSS provides tax-saving benefits at the time of investment, the capital gains on redemption are taxable:

   • Long-Term Capital Gains (LTCG) that exceed ₹1.25 lakh per financial year are taxed at 12.5% for redemptions made on or after 23 July 2024.
   • Short-Term Capital Gains (STCG) rules generally apply to equity mutual funds when units are sold within one year, but ELSS investments cannot be redeemed before three years due to the lock-in period. Therefore, all ELSS redemptions automatically fall under LTCG taxation.
   • For redemptions made before 23 July 2024, the earlier rule of 10% tax on LTCG above ₹1 lakh applied.

   With these factors in mind, investors can invest with a great strategy in ELSS to ensure that they maximise growth, risk, and tax efficiency.

Key Takeaways

ELSS is a type of mutual fund that provides tax advantages and the potential for higher returns over the long term. The ELSS gains, however, are not tax-free. In the redemption effected on or after 23 July 2024, long-term capital gains (LTCG) above 1.25 lakh are taxed at 12.5%, whereas any short-term capital gains (STCG) are subject to tax at the investor's slab rate (or 15% for gains from listed equities/equity funds if sold before 12 months). Since ELSS has a 3-year lock-in, STCG is not possible.

The ELSS funds may be an appropriate investment option for people with a moderate risk profile and long-term financial objectives, since they provide the possibility of capital growth. Nevertheless, the returns are not secured and are market-linked. Despite the lock-in encouraging investment discipline, the strategy also reduces ELSS’s suitability for short-term needs.

Note: Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing.