ELSS Mutual Funds

ELSS stands for Equity Linked Savings Scheme, also called a tax saver mutual fund. A mutual fund is a pool of money from many investors, invested by a professional manager under SEBI rules. ELSS is a category, SEBI's label for what a fund may hold. By SEBI's rule, at least 80% of an ELSS fund's money must sit in equity, shares of companies. Written in 2005, the scheme still applies today: old rules continue if they don't clash with the newer Income-tax Act, 2025.

Since 26 February 2026, SEBI requires every fund's name to match its category. This category's official name is now ELSS – Tax Saver Fund. ELSS is still the name people search for, but scheme names must now carry the fuller one.

A fund house can offer only one ELSS scheme. It can choose the kind: an active ELSS, where a manager picks the shares, or a passive ELSS, an index fund. An index is a list of companies picked by fixed rules. This one copies an index of the top 250 companies by market capitalisation, a company's share price times its number of shares. Either way, the same 80% floor and three-year lock-in apply, stopping early withdrawal.

On the old tax regime, a full ₹1,50,000 deduction saves ₹31,200 in the 20% slab and ₹46,800 in the 30% slab. A tax slab is a band of income taxed at one rate. In the 20% slab, that is ₹30,000 in tax plus 4% cess (an extra charge on tax) of ₹1,200. In the 30% slab, it is ₹45,000 plus ₹1,800 cess. Under the new regime it saves nothing.

Section 123 of the Income-tax Act, 2025 replaced the older, more familiar Section 80C. Section 123 lets you deduct up to ₹1,50,000 a year. If you are on the old tax regime, money put into ELSS can be claimed as a deduction under section 123. A tax deduction is an amount you subtract from your income before your tax is worked out, so you pay less tax.

That limit is shared. It covers a list called Schedule XV. The list also includes PPF (Public Provident Fund, a government savings account) deposits. It includes your own NPS (National Pension System, a retirement savings scheme) contribution. And it includes a five-year tax-saving fixed deposit, or FD. A ₹1,50,000 ELSS investment uses the whole limit on its own. PPF deposits made the same year share it and add no extra room.

Both figures assume income under ₹50 lakh, so no surcharge (an extra charge on the tax) applies, and the whole ₹1,50,000 sits inside one slab.

No, you can't claim ELSS on the new tax regime. India has two tax regimes: old and new. The old regime charges higher rates but lets you claim deductions, like ELSS's, to shrink taxable income first. The new regime, the default unless you choose otherwise, charges lower rates but removes most deductions, including section 123.

Section 202 makes the new regime the default. Section 202(2) lists the few deductions still allowed there, such as an employer's NPS contribution. Section 123 is not among them. To claim ELSS, opt out of the default regime under section 202(4) and be taxed under the old rules instead.

The new regime's own slabs run: no tax up to ₹4,00,000, then 5%, 10%, 15%, 20% and 25%, reaching 30% above ₹24,00,000.

Either way, the fund stays the same equity scheme, with the same 80% floor and three-year lock-in. The regime decides only whether the investment cuts your taxable income.

A lock-in stops you withdrawing your money for a set period. For ELSS it is three years, counted separately for each investment, not from when you first started.

Each time you invest, you get new units. This can be a lumpsum, investing a larger amount at one time. Or it can be one instalment of a SIP, a Systematic Investment Plan: investing a fixed amount at regular intervals, usually every month. The date you get the units is the date of allotment. Each batch of units carries its own three-year lock-in from its own allotment date.

Take a ₹12,500 monthly SIP from April 2026 to March 2027. It pays in the full ₹1,50,000 section 123 limit for the year, if nothing else is claimed under Schedule XV. The twelve instalments don't come free together. The April 2026 one can be redeemed, or sold back, from April 2029. The instalment made in March 2027 frees up in March 2030. If the investor dies before the lock-in ends, a nominee or legal heir can withdraw after just one year from allotment.

A SIP spreads your money across twelve purchase dates, prices and free-up dates. Someone who invests the whole year's amount in March, the tax year's last month, is making a lumpsum instead. That means one price and one date it comes free.

Gains on ELSS after the lock-in are taxed as long-term capital gains: 12.5% on the part above ₹1,25,000 a year. A capital gain is the profit you make when you sell, or redeem, your units.

A gain after the lock-in is always long-term, because three years is longer than the 12-month line for an equity-oriented fund. Long-term gains on such funds are taxed at 12.5% under section 198. This only applies once all your equity long-term gains for the year, added together, cross ₹1,25,000; even then, only the amount above ₹1,25,000 is taxed.

Say you invested ₹1,50,000 in ELSS. After the lock-in, you sell the units for ₹2,50,000, a gain of ₹1,00,000. If it's your only equity long-term gain that year, it stays under ₹1,25,000, so no tax is due. Had the gain instead been ₹1,85,000, only the ₹60,000 above ₹1,25,000 would be taxed, at 12.5%, or ₹7,500, plus 4% cess of ₹300, for ₹7,800 in total. These figures use today's rates to show the maths, not a promise of what any fund will earn.

Some ELSS funds offer an IDCW option (Income Distribution cum Capital Withdrawal). It pays out part of the fund's income or gains. Each payout lowers the fund's NAV, the price of one unit, by the amount paid. The growth option pays nothing out and keeps the money invested.

IDCW is added to your income and taxed at your slab rate. The fund deducts TDS (tax taken out before the money reaches you) of 10% on IDCW above ₹10,000. There's no TDS on a resident's redemption gains.

ELSS suits someone on the old tax regime with room left under the ₹1,50,000 section 123 limit. It suits someone ready to leave the money invested for five years or more, Koshex's own suggestion for an equity holding.

Every mutual fund carries a riskometer: the risk label SEBI makes every fund show, on six levels from Low to Very High, checked every month. As of 29 September 2026, every listed ELSS fund carried a Very High label. It suits money that can sit through a sharp fall, without needing it back soon.

ELSS doesn't suit someone on the new tax regime wanting a deduction, since section 123 isn't available there. Nor does it suit money you might need within three years, since the lock-in leaves no early exit besides the nominee exception on death. Someone wanting an equity fund without a lock-in or deduction could instead look at flexi cap funds, though Koshex suggests five years or more there too.

Start with a fund's past returns, shown as CAGR: the average yearly growth rate, as if the fund had grown at the same pace every year. Compare a fund's three- and five-year CAGR against the category averages, currently 2.7% and 9.1%.

Of the 35 ELSS funds listed today, only 34 have run three years or more, so only those are ranked on 3-year return and counted in the averages. Ranked on three-year CAGR, the fund on top right now is Motilal Oswal ELSS Tax Saver Fund, at 11.2%. That's a record of the past, not a forecast.

Also check the expense ratio: the fund's yearly fee, taken out of the fund's value as a percentage of your money. And check the AUM (Assets Under Management): the fund's current total value, not the amount people paid in. Weigh all this alongside the riskometer.

The lock-in makes this choice matter more than for a fund you could exit any time. A fund picked in a hurry one March stays chosen well past the next. A distributor such as Koshex, registered with AMFI (ARN-154632), helps you choose and manage funds, and can help with the section 123 decision each March.

ELSS, PPF, your own NPS contribution and a five-year tax-saving FD all share the same ₹1,50,000 section 123 limit, and ELSS has the shortest fixed lock-in at three years, counted from each allotment. The table below compares how long your money is locked away, which section gives the deduction, whether it survives the new tax regime, and how any return is taxed.

PPF ties money up far longer: an account matures 15 years after the end of the year it opened, though partial withdrawal opens from the seventh year. NPS normally lets you exit at 15 years of subscription or at age 60, whichever comes first. An early exit needs at least 80% of the money to buy an annuity, a product that pays a regular pension. NPS also carries a separate ₹50,000 deduction under section 124(3), on top of the ₹1,50,000 limit.

Only NPS partly survives the new regime: an employer's contribution keeps its deduction, while your own contribution loses it, as do ELSS, PPF and the FD.

ELSS keeps at least 80% in shares throughout, so what you get back moves with the share market. PPF pays a rate the government sets every quarter. It was 7.1% for July–September 2026. Bank FD interest isn't among the exemptions in Schedule II, the Act's list of tax-free income, so it is taxed at slab rates.