What are ELSS Funds? Meaning, Benefits, & Best ELSS to Invest

ELSS (Equity Linked Savings Scheme) is a mutual fund that invests mostly in stocks and gives tax-saving benefits under Section 80C. It has a 3-year lock-in. It’s ideal for long-term growth and tax savings.

For example, Ravi had ₹1.5 lakh, and his uncle asked him to invest in PPF, ‘kyunki SAFE hai!’ But Ravi had plans. He didn’t want to lock in his money for 15 years. He wanted tax savings and growth. That’s how he invested in ELSS (Equity Linked Savings Scheme). 

Let’s say Ravi invests ₹1.5 lakh in ELSS instead of PPF. Here is the comparison between the two:
 

So Ravi’s ₹1.5 lakh in ELSS could become ₹2-2.25 lakh in 3 years. Additionally, he saves up to ₹46,800 in tax under Section 80C (if in the 30% slab).

ELSS sounds interesting, right? ‘Growth bhi, savings bhi!’ Won’t it be wise to dig deeper into this concept? Let’s see how it works, its key benefits, and the best funds to invest in 2025.

ELSS Funds Hai, Rocket Science Nahi!

An Equity-Linked Savings Scheme (ELSS) is a type of equity mutual fund that diversifies your investments and helps you save taxes. It achieves this by investing at least 80% of its corpus in equity or equity-related securities. ELSS is unique among tax-saving instruments as it offers market-linked growth combined with tax benefits 

Here are the key features of every typical ELSS Fund:

• Tax Deduction: You can claim a tax deduction of up to ₹1,50,000 per financial year under Section 80C by investing in ELSS. This helps reduce your taxable income and can save you up to ₹46,800 in taxes if you fall under the 30% tax bracket.
   
• Lock-in Period: ELSS has a mandatory lock-in period of 3 years, which is the shortest among popular 80C investments. In comparison, options like PPF have a 15-year lock-in, while NSC and tax-saving FDs require 5 years.
   
• Market-Linked Returns: Since ELSS invests in equity markets, returns are market-linked and can be volatile in the short term. However, they offer the potential for higher, inflation-beating returns over the long run.

Legal Sections and Regulations Related To ELSS Funds

Before investing in ELSS funds, it’s important to understand the legal framework that governs them. These funds are regulated by specific provisions under the Income Tax Act, CBDT notifications, and SEBI mutual fund regulations. Further details are given below:

 1. Income-Tax Act, Section 80C

ELSS investments qualify for a deduction under Section 80C. It allows up to ₹1,50,000 deduction per financial year from taxable income 

2. Equity-Linked Savings Scheme Rules, 2005

It is notified by the Central Board of Direct Taxes (CBDT) via Notification No. 226/2005 (03-11-2005), under the power of Section 80C(2)(xiii). The key provisions under this rule include:

• Rule 3: Defines eligible investment in ELSS plans.
   
• Rule 4: Restricts transferability of ELSS units during the 3-year lock-in.
   
• Rule 5: Ensures a minimum 80% investment in equity and equity-related instruments.
   
• Rules 1 & 8–9: Declare the short title, commencement date, and open-ended nature of ELSS funds.

3. SEBI Mutual Fund Regulations (1996)

SEBI rules require AMCs to launch and manage ELSS schemes responsibly. They must follow proper governance and disclosure norms. This includes clear fund categorisation and regular updates to investors. These rules help protect investors and maintain transparency in mutual fund operations.

4. SEBI Rules on Active vs Passive ELSS (2022)

According to the SEBI circular dated May 23, 2022:

• Mutual funds are now allowed to launch passive ELSS schemes that track a top 250 market-cap index.
   
• However, each mutual fund can offer only one type of ELSS, either active or passive, not both.

Read More – Tax Saving Options For Salaried – Top Deductions & Smart Tips

Best ELSS Funds To Invest

‘Tera Dhyan Kidhar Hai, Tera Hero Fund Idhar Hai!’

If you are confused between different ELSS funds, I suggest you go for the top funds. These are the ones which are giving consistent (almost) returns over a period.

Here’s a quick view of their 5-year returns and why they’re worth investing in. 
 

These ELSS funds have a strong track record and follow quality investment strategies. Even if you’re new to investing and just three months in, you’re likely to come across their names.

What Makes ELSS Funds So Special?

ELSS funds are more than just about tax savings. They offer the shortest lock-in period, high long-term returns and more. Let’s see a few of the benefits of ELSS funds in this section:

1. Save Tax and Grow Your Money

ELSS lets you save tax by reducing your taxable income by up to ₹1,50,000 under Section 80C.
At the same time, it gives you a chance to grow your money by investing in the stock market. Not every tax-saving option offers this perk.

2. Shortest Lock-In Period – Just 3 Years

Among all Section 80C options like PPF, NSC, or tax-saving FDs, ELSS has the shortest lock-in period of just 3 years. This means you get more liquidity while still keeping the habit of disciplined investing.

3. High Long-Term Returns

ELSS funds have historically given average returns of around 12–15% over 7 to 15 years.
Many funds perform better than traditional options like PPF or FDs, which makes ELSS attractive for long-term wealth building.

4. SIP and Rupee-Cost Averaging

Investing in ELSS through SIPs helps you average out market ups and downs. You buy more units when prices are low and fewer when they are high, making investing smoother and more effective over time.

5. Managed by Experts

ELSS funds are handled by professional fund managers from trusted asset management companies (AMCs). They select quality stocks and manage risk, so you don’t need to pick stocks yourself to benefit from equity growth.

Direct vs Regular ELSS Plans: Which One Should You Choose?

‘Same-Same, But Different!’

Also Read  - What Is a Debt Mutual Fund: Types, Benefits, Risks & Taxation Rules

That’s what happens when you choose between Direct and Regular plans in mutual funds, including ELSS. While both offer exposure to the same portfolio, the returns and costs can differ significantly based on how you invest.

If you're confused between the two, here's a breakdown to help you make a decision.
 

Even a small 0.5% difference in yearly costs can make a big impact over time. In the long run, it could mean a difference of several lakhs or even crores in your total investment value.

Here are the further details regarding the expense ratio and scheme fact sheets:

1. Expense Ratio 

Always look at the Total Expense Ratio (TER) mentioned in the fund’s factsheet before investing. Direct plans usually have lower TER, about 0.5% to 1% less than regular plans.

2. Scheme Fact Sheets (Monthly/Quarterly)

These fact sheets give you important details like returns (CAGR), where your money is invested, and comments from the fund manager. They also show risk levels and how the fund is performing compared to its benchmark. You can download these sheets from the fund company’s website or the official service provider (RTA).

Conclusion

ELSS is a smart way to save tax. If you are aiming for better long-term returns through equity investments, this is for you. If you want just a short lock-in period, this fulfils this requirement too! If you hate paperwork, love growth, and want tax benefits too, ELSS checks all the boxes.

Frequently Asked Questions
 

How much tax can I save with ELSS?
Up to ₹1,50,000 under Section 80C, which can reduce your tax by ₹46,800 (if in 30% slab).
 

Is ELSS suitable for beginners?
Yes! It’s simple to invest in, has a short lock-in, and offers strong growth potential.
 

What is the lock-in period?
Just 3 years, the shortest among all 80C investment options.
 

Are returns guaranteed?
No, returns depend on market performance, but long-term returns are often higher than traditional options.
 

Can I start with SIP?
Absolutely! Starting ELSS with a small monthly SIP is a great way to build discipline and grow wealth.
 

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