ELSS Mutual Funds: Meaning, Benefits, Taxation & How to Invest

Published on October 06, 2025 | 3 min read

Summary

Equity Linked Savings Schemes (ELSS) are tax-saving mutual fund schemes that provide dual benefits tax saving and generating reasonable returns. These funds have a mandatory lock-in period of three years and provide tax deduction benefits of up to ₹1.5 lakh under Section 80C of the Income Tax Act.

Key Takeaways

ELSS mutual funds invest 80% of their assets in equity, and the remaining is in debt.
These funds allow you to save taxes up to ₹1.5 lakh per year.
The minimum lock-in period for the ELSS funds is 3 years.
ELSS funds carry risk due to high equity exposure.

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What are ELSS Mutual Funds?

ELSS mutual funds are a type of open-ended mutual fund that are mandated to invest at least 80% of their assets in equities and equity-related instruments. The remaining portion is to be invested in debt securities.

By investing in ELSS funds, you can claim an income tax deduction. You can save up to ₹1.5 lakh per year, but the excess will not qualify you to avail the tax benefits as per the provisions of Section 80C, Income Tax Act 1961.

Moreover, the gains up to ₹1.25 lakh per financial year are exempt from LTCG tax. Any amount exceeding this threshold is taxed at 12.5%.

Features of ELSS Mutual Funds

ELSS funds are popular due to certain features:

Tax Saving

In ELSS funds, you get tax-saving benefits of up to ₹1.5 lakh, which is a unique feature which makes ELSS different from other equity funds.

Lock-in Period

They have a 3-year lock-in period. This is the lowest across all other categories of tax-saving instruments.

High Equity Exposure

These funds primarily invest in equities, offering a higher return potential.

Mode of Investment

You can invest in ELSS funds via a lump sum or through a Systematic Investment Plan (SIP). SIP allows you to take advantage of rupee cost averaging, which benefits you during different market cycles.

Benefits of Investing in ELSS Mutual Funds

Here are the benefits of investing in ELSS mutual fund schemes:

Diversification

ELSS funds invest across various sectors and market capitalisations, providing the diversification benefits.

Better Returns than Tax-saving options

The returns from these funds are market-linked; if the market performs well, ELSS is likely to deliver similar returns, which are usually higher than those of traditional tax-saving investments.

Wealth Creation

Equity exposure helps generate higher returns that comfortably beat inflation and create wealth.

Factors to Consider Before Investing in ELSS Mutual Funds

When investing in ELSS mutual funds, certain factors should be considered:

Investment Horizon

ELSS funds are ideal for those with a long-term investment horizon. These funds have a minimum lock-in period of 3 years. Staying invested for at least 5 to 7 years can increase potential returns.

Lock-in Period

When you invest in ELSS funds, the money is locked for 3 years, restricting the withdrawals. Ensure you do not invest your emergency funds.

Risk Appetite

These funds have high exposure to equities, which are a risky asset class. Only opt for ELSS if you have a high-risk appetite.

Expense Ratio

Compare the expense ratios of other ELSS funds. Choosing a lower-expense-ratio can be a good option to maximise the overall returns in the long run.

How to Invest in ELSS Funds via Upstox?

To invest in ELSS funds via Upstox, make sure you have an active demat account and the App installed on your mobile. Then follow the instructions:

Open the Upstox App
Click on the Mutual Funds tab from the menu
In the search bar, type ELSS
You will get to see various ELSS schemes from different companies
Choose one comparing the expense ratio and past returns.
Choose a mode of investment: lump investment or SIP
Enter the amount, set the instalment date (for SIP)
Complete the payment.
That’s set.

ELSS mutual funds are tax-saving investment instruments that invest primarily in equities, along with some exposure to debt. Their lock-in features and eligibility for deductions under Section 80 of the Income Tax Act make them unique from other equity funds.

ELSS funds are suitable for investors with a long-term investment horizon, who can bear market fluctuations and are comfortable with a 3-year lock-in period.

About Author

Subhasish Mandal

Sub-Editor

Finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.

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About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.