ELSS Tax Saver Funds: Tax Deduction, Lock-in, Returns and Every Fund Compared

What is an ELSS fund?

ELSS stands for Equity Linked Savings Scheme. An ELSS fund is an open-ended equity mutual fund run under the Equity Linked Saving Scheme, 2005, notified by the Ministry of Finance: it must keep at least 80% of its assets in shares and equity-related instruments, and every investment is locked in for three years.

In SEBI’s February 2026 rules on scheme categories the category is called “ELSS – Tax Saver Fund”, which is why most funds in the table carry “ELSS Tax Saver” in their names. The rules set no limit on company size, so an ELSS fund can hold large, mid or small companies in any mix, much like a flexi cap fund.

The tax deduction: section 123, formerly 80C

From 1 April 2026 the Income-tax Act, 2025 replaced the Income-tax Act, 1961, and the old section 80C deduction became section 123, read with Schedule XV. Subscriptions to ELSS units are one of the items Schedule XV lists.

• Limit: up to ₹1.5 lakh a year, in total, across every item in Schedule XV, such as life insurance premiums and provident fund and PPF contributions. If those already use the limit, an ELSS investment saves no further tax.
• Who can claim it: individuals and Hindu undivided families.
• Old regime only: the deduction is available only if you choose the old tax regime. Under the new regime, which is the default, ELSS gives no deduction.
• Tax saved: the deduction lowers your taxable income, so the saving depends on your slab. At the 30% slab with 4% cess, a full ₹1.5 lakh deduction saves up to ₹46,800, plus surcharge where it applies.

Tax rules change; check your own case with a tax adviser.

The three-year lock-in

Units in an ELSS fund cannot be redeemed or switched for three years from the date they are allotted. Of the common section 123 options, that is the shortest lock-in: a PPF account runs for 15 years, and tax-saver bank deposits and NSC lock money in for five.

With a SIP, every instalment has its own three-year lock-in. Units bought in January 2027 become free in January 2030, those bought in February 2027 in February 2030, and so on. After three years you can redeem or stay invested; the units do not mature or pay out on their own.

How ELSS gains are taxed

Under the Income-tax Act, 2025, which applies from 1 April 2026, a fund counts as equity-oriented if, on average over the year, at least 65% of its money is in listed shares of Indian companies (section 198(8)). ELSS funds hold at least 80% in equity and are treated as equity-oriented funds. Because of the three-year lock-in, any units you redeem have been held for more than 12 months, so the gains are long-term.

• Held 12 months or less: gains are short-term and taxed at 20%.
• Held longer: gains are long-term. The first ₹1.25 lakh a year of long-term gains on equity shares and equity-oriented funds together is tax-free; the rest is taxed at 12.5%.
• Surcharge, where it applies, and 4% cess come on top. STT of 0.001% is charged when you redeem.

For resident investors there is no TDS on capital gains when you redeem; dividend (IDCW) payouts above ₹10,000 in a year have 10% tax deducted. Tax rules change; check your own case with a tax adviser.

What ELSS funds hold

With no rule on company size, ELSS funds differ a lot: some keep most of their money in large companies, others hold a good share of mid and small caps. The factsheet shows each fund’s split, and the lock-in means you stay with that mix for at least three years.

Most ELSS funds measure themselves against the Nifty 500 TRI or the BSE 500 TRI, which cover the 500 largest listed companies with dividends reinvested. A few are index funds: the table includes an ELSS fund that tracks the Nifty 50, at a much lower expense ratio than the active funds.

ELSS, PPF, tax-saver FD or a flexi cap fund?

• ELSS fund: market-linked returns, which can be negative; three-year lock-in; counts towards section 123 under the old regime; long-term gains taxed at 12.5% above ₹1.25 lakh a year.
• PPF: government-backed, with an interest rate the government sets each quarter; 15-year account; counts towards section 123.
• Tax-saver bank deposit: fixed interest for five years; counts towards section 123; the interest is taxed as income.
• Flexi cap fund: a similar portfolio with no lock-in and no deduction. If you are on the new regime, this is the closer comparison. See flexi cap funds compared.

Risks to know

• Market falls: with at least 80% in shares, an ELSS fund can be worth less than you put in when the lock-in ends.
• The lock-in works both ways: you cannot sell during a fall, and you cannot switch out of a fund that is doing badly until its units are free.
• Tax regime: the deduction only helps under the old regime, and only within the ₹1.5 lakh limit shared with other items.
• Fund manager: with no size rule, the manager’s choices drive most of the difference between funds.

How to choose an ELSS fund

There is no single best ELSS fund: each holds a different mix, and the leader in one year is often not the leader the next. Compare them on these points instead:

• Whether you need the deduction: check your tax regime and how much of the ₹1.5 lakh limit is already used.
• Company-size mix: the factsheet shows how much sits in large, mid and small companies.
• Returns over three and five years: compare them with the Nifty 500 TRI or the fund’s own benchmark, and look at how far the fund fell in bad years.
• Direct plan: the same portfolio for a lower expense ratio. See direct vs regular plans.
• Expense ratio: compare the direct plans. How the expense ratio works.