What is ELSS Fund ?

5paisa Research Team

Last Updated: 28 Apr, 2025 05:50 PM IST

What are ELSS Funds?

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In the ever-evolving industry of personal finance, where new investment tools keep emerging and tax rules get updated almost every year, it’s crucial to stay informed to take right decision regarding investment. 

ELSS funds can be an ideal solution for you if you are an investor looking to reduce your income tax liability and grow wealth over time.

But what is an ELSS fund, and why has it become one of the most talked-about tax-saving instruments in India? In this detailed guide, we’ll explore everything you need to know about ELSS funds in the simplest terms, so even if you’re not a finance expert, you will have detailed insights and confidence to make informed decisions.
 

What is an ELSS Fund and Why Should You Consider It?

An Equity Linked Savings Scheme is a mutual fund that focuses on investing mostly in stocks to help grow your money over time.
It is a market-driven investment option that supports long-term wealth creation while also providing tax benefits under Section 80c of the Income Tax Act.

If you’ve ever wondered what the ELSS scheme is in a mutual fund, the answer is simple. It is a tax-saving mutual fund scheme that allows you to invest in the stock market through a professionally managed fund while also offering tax benefits.

So, what is ELSS? It is an equity mutual fund with a minimum 3-year lock-in period, and it qualifies for tax deduction up to ₹1.5 lakh in a financial year.
 

What are the Features of an ELSS Fund?

To understand what an ELSS fund is in detail, let’s look at its key features,

Equity Exposure: Such funds invest a large portion of their assets of funds in equity and equity-related instruments. This gives you a chance to earn higher returns compared to fixed-income tax-saving options like PPF or NSC.

Shortest Lock-In Period: ELSS has a mandatory lock-in of 3 years, which is the lowest among all 80c instruments.

Choices of Plans: ELSS funds offer investors to choose from two plan choices, growth and dividend. In the growth option, any returns earned are reinvested back into the fund and paid out as a lump sum when you redeem your investment. On the other hand, the dividend option provides you with regular payouts whenever the fund declares a dividend.

Professional Fund Management: Such type of fund is managed by experienced fund managers who make investment decisions based on extensive research and analysis.


These features make ELSS funds an attractive option for people who want to combine tax savings with wealth creation.
 

Who Can Invest in ELSS Funds?

ELSS funds are a good choice of investment for a wide range of investors, regardless of their age or income level. Here’s who should consider investing,

Salaried Individuals: If you're looking to save tax under Section 80c while growing your money over time, ELSS is an ideal choice.

First-Time Investors: ELSS is often considered a great entry point into equity investing, as it comes with the added benefit of tax savings.

Young Professionals: If you’ve just started your career and want to begin investing for the long term, ELSS offers both flexibility and growth potential.

Self-Employed or Business Owners: If you want to reduce your tax burden and have some idle funds, investing in ELSS can help you achieve your financial goals.


Investors shall know that past returns from investment do not assure similar profits in the future. It is advisable to seek guidance from a financial advisor and carefully assess the fund’s goals and risk factors before making any investment decisions.
 

How Do ELSS Funds Help You Save Tax and Grow Wealth?

Now let’s understand how ELSS funds offer the dual benefit of tax savings and wealth creation:

Tax Benefit: Investing up to ₹1.5 lakh in an ELSS allows you to avail a deduction under Section 80c of the Income Tax Act, effectively lowering your overall taxable income.

Growth: Because ELSS funds invest in equities, these funds have the potential to offer higher returns than traditional tax-saving instruments. Over the long term, returns can range from 10% to 15% or even higher, depending on market conditions.

This combination makes ELSS one of the most effective tools for individuals aiming to optimise their tax planning and long-term financial goals.
 

Benefits of Choosing ELSS Funds for Tax and Wealth Growth

There are several reasons why ELSS funds are preferred by both beginners and experienced investors:

Strong Earning Potential: Over time, equity investments have generally outperformed fixed-income options in terms of returns. ELSS allows you to tap into the growth of equity markets while enjoying tax-saving benefits.

Disciplined Investing via SIP: You can invest in ELSS through a Systematic Investment Plan (SIP), starting from as low as ₹500. This helps build a habit of regular investing and averages out market volatility.

Short Lock-in Tenure: Unlike other tax-saving schemes, such as PPF with a 15-year term or NSC with 5 years, ELSS requires you to stay invested for only 3 years.

Flexibility: After the lock-in period, you can either redeem your units or continue holding them to benefit from further market growth.

Easy to Access and Monitor: ELSS funds are available through all major mutual fund platforms and apps, making them convenient to invest in and track.

Understanding the Taxation of ELSS Mutual Funds

Although ELSS investments are eligible for tax deductions, the earnings from such funds are still subject to capital gains tax.
Long-Term Capital Gains (LTCG): Due to the mandatory 3-year lock-in, any profits made are treated as long-term gains. Profits more than ₹1 lakh in a single financial year are taxed at 10% without the benefit of indexation.

Tax on Dividends: For those choosing the dividend option, any payouts received are considered part of your total income and are taxed according to your applicable income tax slab.

This tax treatment is relatively favourable compared to traditional tax-saving tools, where the entire return amount is generally taxable.
 

What Aspects Should You Consider Before Investing in ELSS Funds?

Consider the following key aspects before investing in an ELSS Fund,

Risk Level: ELSS invests in the stock market, so returns can vary. Make sure you're comfortable with some ups and downs in the short term for better potential growth over time.

Investment Duration: Although the lock-in period is 3 years, staying invested for 5 to 7 years or more can help you get the most benefit from market growth.

Past Performance of the Fund: Look at how the fund has performed in different market situations.

Expertise of Fund Manager: The experience and track record of the fund manager matter. A skilled manager can make better investment decisions and improve returns.

Expense Ratio: Lower expense ratios can boost your long-term returns. Compare direct and regular plans before investing.


 

ELSS vs Other Tax-Saving Investments: Which Is Better?

Here’s a comparison to help you decide where ELSS stands among popular 80c options.

Investment Option Lock-in Period Return Type Risk Level Tax Benefit Under 80c
ELSS (Equity Linked Savings Scheme) 3 years Market-linked High Yes
PPF (Public Provident Fund) 15 years Fixed (7–8% approx) Low Yes
Tax-saving Fixed Deposit 5 years Fixed (6–7%) Low Yes
NSC (National Savings Certificate) 5 years Fixed (6.8%) Low Yes


If you’re comparing ELSS to traditional tools like PPF or NSC, ELSS offers higher growth potential but comes with higher risk. It suits those who are looking for wealth creation over a long-term horizon.

What Options Are Available for Investment in ELSS?

There are different ways to invest in ELSS depending on your convenience:

  • Lump Sum Investment: Invest a one-time amount, ideal for those looking to invest their annual bonus or year-end savings.
  • Systematic Investment Plan: A fixed amount is invested monthly in SIPs. This helps build the habit of regular saving and investing and reduces the impact of market volatility.
  • Direct Plan: Invest directly with the mutual fund company, which generally has a lower expense ratio.
  • Regular Plan: Invest through an advisor or distributor, useful if you need handholding or financial guidance.


Choose the method that aligns with your financial habits and risk profile.
 

Conclusion

To summarise, ELSS funds are one of the most powerful financial tools available for Indian investors today. They allow you to save taxes under Section 80c, while also building long-term wealth through equity market exposure.
 

More About Mutual Funds

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.

Frequently Asked Questions

Every investment in an ELSS fund comes with a lock-in period of 3 years. If you invest through SIP, each monthly payment is individually locked for 3 years from the date it was made. You won’t be able to withdraw or switch those units until the lock-in period is over.
 

ELSS funds mainly invest in stocks, so their returns depend on how the market performs and are not guaranteed. While there’s some risk involved, they can offer better long-term returns than traditional fixed-income options.

With a shorter lock-in period and the possibility of earning higher returns, ELSS appeals to investors who are comfortable taking on more risk. In contrast, PPF and NSC provide more security but come with fixed returns and longer lock-in commitments. ELSS is ideal for those aiming to build wealth over the long term while also benefiting from tax deductions.

An ELSS SIP is a Systematic Investment Plan where you invest a fixed amount regularly (monthly/quarterly) in an ELSS fund. It promotes disciplined investing while offering tax-saving and long-term wealth-building benefits.
 

You can invest in ELSS through SIP by selecting your fund, choosing the SIP option, setting an investment amount and frequency, and linking your bank account. You can do this via investment platforms or your demat account.

There is no single best ELSS fund, as it depends on your financial goals and risk tolerance. Look for funds with consistent long-term performance, experienced fund managers, and low expense ratios before choosing.

ELSS is a type of mutual fund that offers tax-saving benefits and has a 3-year lock-in. Regular mutual funds may not offer tax benefits and typically allow withdrawals without a fixed lock-in.
 

It’s advisable to invest in 2 to 3 ELSS funds to maintain diversification without overcomplicating your portfolio. Choose funds with different strategies or market caps for better risk management.
 

ELSS has the potential for higher returns than PPF due to its equity exposure and shorter 3-year lock-in. However, PPF offers fixed, tax-free returns and is better suited for conservative, long-term investors.
 

After the 3-year lock-in period, you can redeem your ELSS units partially or fully, or stay invested. There's no obligation to withdraw, and keeping the investment longer may yield better returns.

The lock-in period for ELSS funds is three years from the date of investment. You cannot withdraw or redeem the invested amount during this period. Each SIP installment has a separate 3-year lock-in.
 

ELSS funds invest in equities, so they are subject to market risk, economic fluctuations, and volatility. While they can offer high returns over time, short-term performance may vary significantly based on market conditions.
 

You can calculate ELSS returns online using mutual fund calculators. Enter your investment amount, duration, and expected rate of return to estimate the future value of your investment, including SIP-based projections

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