An ELSS (Equity Linked Savings Scheme) is a diversified equity mutual fund that invests at least 80% in equities, carries a 3-year lock-in, and qualifies for Section 80C tax deduction up to ₹1.5 lakh—but only if you opt for the old tax regime. Long-term gains on redemption are taxed under the post-July 23, 2024 rules. (AMFI India, ClearTax)
How ELSS Works
- Category & mandate: ELSS is a SEBI-defined category. Schemes must keep ≥80% in equity/equity-related instruments (per the Equity Linked Saving Scheme, 2005). (AMFI India)
- Lock-in: Units are locked for 3 years—the shortest among major 80C options. You can’t redeem, switch out, or even pledge units during this period. For SIPs, each instalment has its own 3-year clock. (AMFI India, utimf.com, dspim.com, Groww)
- Investment options: Growth or IDCW (dividend) options are available. IDCW, if declared, can be paid even during lock-in; taxation applies (see below). (Nippon India Mutual Fund, HDFC Bank)
Tax Benefits & Latest Rules (FY 2025–26)
Section 80C deduction
- Eligibility: Investments in ELSS qualify for deduction up to ₹1.5 lakh under Section 80C—only under the Old Tax Regime. The New Tax Regime (115BAC) does not permit 80C deductions. If you want the deduction for a given FY, you must opt for the Old Regime for that FY. (AMFI India, ClearTax)
Capital gains on redemption
From July 23, 2024, India simplified capital gains on listed equities & equity mutual funds:
- LTCG rate: 12.5% on gains above ₹1.25 lakh/year (earlier: 10% above ₹1 lakh).
- STCG rate: 20% (earlier: 15%).
ELSS redemptions occur after 3 years, so gains are long-term under the current rules. Changes apply only to transfers on/after July 23, 2024. (Press Information Bureau, The Economic Times, Reuters)
IDCW (Dividend) taxation
- Tax: IDCW from mutual funds is taxed at your slab rate in your hands (DDT abolished in 2020).
- TDS: Generally 10% TDS applies on mutual fund dividends above the threshold (₹5,000 historically; Budget 2025 proposed increasing to ₹10,000 from April 1, 2025—confirm with your AMC/26AS). No TDS on capital gains for residents. (ClearTax, The Economic Times, Grip Invest)
ELSS vs Other 80C Options (Lock-in Snapshot)
- ELSS: 3 years (market-linked; equity risk).
- Tax-saving FD: 5 years (interest taxable). (ClearTax)
- NSC: 5 years. (ClearTax)
- ULIP: 5 years (insurance+investment). (Policy Holder)
- PPF: 15 years (EEE status). (ICICI Bank)
- Sukanya Samriddhi: 21 years (partial withdrawals allowed after 18). (SBI)
Download the visual: Lock-in Periods under Popular 80C Options
Who Should Consider ELSS?
- Investors in the Old Tax Regime seeking 80C savings and comfortable with equity volatility.
- First-time equity investors willing to commit for 5–7+ years (even though lock-in is 3, equity works best with a longer horizon).
- HNIs using ELSS as a satellite allocation for tax-efficient exposure, while core equity exposure sits in diversified equity funds/PMS/AIFs.
How to Choose a Good ELSS
Evaluate beyond “tax saving”:
- Consistency over calendar years: Rolling returns vs Nifty 500/Nifty 200.
- Risk-adjusted metrics: Standard deviation, downside capture, max drawdown.
- Portfolio quality: Sector and market-cap balance; no unintended factor bets.
- Costs: Total Expense Ratio (TER) and tracking vs peers.
- AUM & liquidity: Prefer reasonably scaled funds to avoid concentration.
- Fund house process: Governance, team depth, and adherence to mandate.
SIP vs Lump Sum in ELSS
- SIP: Smooths entry across market cycles; remember each instalment locks for 3 years. Ideal for salaried investors planning across the year. (Groww)
- Lump sum: Works when valuations are reasonable and you invest early in the FY to start your 3-year clock. Avoid last-minute March rush.
Tax-Saving Math (Old Regime)
Formula:
Tax saved = min(Your ELSS investment, ₹1,50,000) × your slab rate × (1 + 4% cess)
Example: If you’re in the 30% slab and invest ₹1.5 lakh, estimated tax saved = 1,50,000 × 30% × 1.04 = ₹46,800 (assuming you have 80C headroom).
Remember: Under the New Regime, 80C deduction isn’t available. (ClearTax)
Exit Strategy After Lock-in
- After 3 years, ELSS units become fully liquid like any open-ended equity fund.
- You may stagger redemptions to manage taxes (use the ₹1.25 lakh annual LTCG exemption efficiently post-July 23, 2024). (The Economic Times)
- If the fund still fits your asset allocation and is performing, no need to redeem immediately.
Common Mistakes to Avoid
- Choosing New Regime but buying ELSS—you’ll get no 80C benefit. (ClearTax)
- Last-minute investing: Lumpsum in March without risk assessment.
- Ignoring IDCW tax: Dividends are taxable at slab; don’t assume they’re tax-free. (ClearTax)
- Churning after lock-in: Switching solely because lock-in ended, not due to fundamentals.
- Overconcentrating 80C in ELSS: Balance with PPF/EPF/Term insurance premiums based on goals and risk.
FAQs
1) Is ELSS still attractive after the 2024 capital-gains changes?
Yes. While LTCG on equity mutual funds rose to 12.5% and the exemption increased to ₹1.25 lakh, ELSS remains the only 80C option with equity upside and the shortest lock-in. Suitability depends on your risk and regime choice. (The Economic Times, AMFI India)
2) Can I claim 80C under the New Tax Regime?
No. To claim ELSS under 80C, you must opt for the Old Regime for that FY. (ClearTax)
3) How is ELSS taxed on redemption?
After 3 years, gains are LTCG. If sold on/after July 23, 2024, gains above ₹1.25 lakh in a FY are taxed at 12.5% (plus cess/surcharge). (The Economic Times)
4) Are dividends (IDCW) from ELSS taxed?
Yes, at your slab rate; TDS may apply if dividend exceeds the threshold (₹5,000 historically; proposal to ₹10,000 from April 1, 2025). (ClearTax, The Economic Times)
5) If I invest via SIP, when can I redeem?
Each SIP instalment unlocks exactly 3 years after its own investment date. (Groww)
Quick Reference: ELSS at a Glance
- Type: Equity mutual fund (≥80% equity). (AMFI India)
- Tax benefit: Old Regime 80C up to ₹1.5 lakh. (AMFI India)
- Lock-in: 3 years (no redemption/pledge). (utimf.com)
- Tax on gains: LTCG 12.5% above ₹1.25 lakh (for sales on/after 23-Jul-2024). (The Economic Times)
- IDCW tax: Taxed at slab; TDS rules apply. (ClearTax)
- Risk level: High (equity market risk).
Bottom Line
ELSS is a smart 80C tool for investors who (1) choose the Old Tax Regime, (2) can tolerate equity volatility, and (3) will stay invested beyond 3 years. Build exposure via SIPs, choose process-driven funds, and plan exits to utilise the ₹1.25 lakh LTCG exemption efficiently.
Related reads (internal):
- How are Mutual Funds Taxed?
- Direct vs Regular Mutual Funds
- Understanding Mutual Fund Ratings
- How to Read a Mutual Fund Factsheet
Compliance note: Tax rules cited reflect CBDT/PIB communications and mainstream reportage on changes effective July 23, 2024; verify personal applicability with your CA. (Press Information Bureau, Reuters)