ELSS Mutual Funds: Tax benefits and lock-in

While planning your finances, you not only look for investment options that offer healthy returns, but also help you save on taxes. ELSS (Equity Linked Saving Scheme) mutual funds stand out as they offer both to the investors. That’s why they’re also known as 'tax-saving mutual funds.’

What are ELSS funds?

Equity linked savings scheme (ELSS), as the name suggests are funds that invest a majority of their corpus into equity instruments like stocks. They invest in large, mid, and small-cap companies across various industries.

Here are the key features:

  • Lock-in period: ELSS funds have a lock-in period of 3 years, which is the lowest amongst all tax saving instruments like PPF, NPS, tax-saver FDs, etc. You can also continue investing even after the completion of 3 years.

  • Equity exposure: These funds invest a minimum of 80% in equity and equity-linked instruments.

  • Tax benefit: ELSS funds offer a tax deduction under section 80C of the Income Tax Act, allowing you to claim a maximum deduction of up to ₹1.5 lakhs. So, if you fall in the 30% slab, you can save up to ₹46,800 in taxes.

  • Minimum investment: While the minimum investment amount depends on the fund that you choose, most ELSS funds start from as low as ₹500.

  • Taxation on capital gains: As ELSS funds have a lock-in of 3 years, the gains/profits on selling them will be classified as long-term capital gains and will be taxed at flat 10%. Moreover, LTCG of up to ₹1 lakh are exempted from taxes, hence the 10% tax will be applicable on gains over ₹1 lakh.

  • Taxation on dividend: Dividends received from ELSS mutual funds are taxable as ‘income from other sources (IFOS)” at applicable slab rate.

Should I opt for lumpsum investment or SIP?

Your choice between lump sum and SIP depends on your income situation. For last-minute tax-saving investments, lump sum investment may be suitable. Conversely, if you’ve planned in advance, SIPs enable you to invest smaller amounts monthly.

The only thing you need to keep in mind here is the lock-in period.

In case of lumpsum investment, the lock-in will be calculated from the day you make the investment. Say you bought units of an ELSS fund on 5th February 2024, the 3 year lock-in would end on 5th February 2027. Simple.

But in case of SIPs, each monthly installment will be considered a different investment. Hence, the lock-in for the SIP amount for 1st February 2024 will be till 1st February 2027, and the lock-in for the SIP amount for 1st March 2024 will be till 1st March 2027.

Should I invest in ELSS funds if I am opting for the new tax regime?

Most people invest in ELSS funds to claim tax benefits u/s 80C, but this deduction is only allowed under the old tax regime.

So, if you have opted for the new tax regime, ELSS funds won’t give you any tax benefits and this would put them on par with other equity mutual funds. Hence, the only thing that would matter now would be the potential returns that the ELSS fund would generate.

In this case, you can compare them to other equity mutual funds and make a decision. Also, do not forget that ELSS funds would come in with a 3-year lock-in whereas you will be able to redeem units from other mutual funds whenever you want.

Here’s a video for you!

Have doubts? Ask 'em below.


Is there a limit on the amount of maximum investment?

Hi @shreya_sharma,

There is no maximum limit to the amount you can invest in a mutual fund. However, every mutual fund would have some minimum criteria.

Hope it helps.

1 Like

@Muskan_Balar Is trading account mandatory for investment in ELSS?

Hey @akash_jhaveri,

Hope this clarifies!