Top ELSS Funds In 2026 To Save Tax Under Section 80C (Now Section 123)

Q: Q1: What is ELSS and how does it save tax?

ELSS stands for Equity Linked Savings Scheme -- the only mutual fund eligible for a tax deduction under Section 123 of the Income Tax Act. You can invest up to Rs 1.5 lakh in an ELSS fund per financial year and claim that amount as a deduction from your taxable income. If you are in the 30% tax bracket, this saves you Rs 46,800 in direct tax annually under old regime.

Q: Q4: Can I invest in ELSS through SIP?

Yes -- SIP is actually the recommended way to invest in ELSS for salaried investors. Start a monthly SIP in April at the beginning of the financial year rather than investing a lump sum in January or March. This gives you rupee cost averaging across the full year, spreads the 3-year lock-in clock across monthly instalments, and removes the emotional pressure of last-minute tax-saving decisions.

Last Updated: May 23, 2026

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Every March, Millions of Indians Scramble to Save Tax — Most Pick the Wrong Option

The last 90 days of every financial year trigger the same ritual across India: frantic Google searches, calls to bank relationship managers, and last-minute investments in tax-saving FDs or PPF top-ups.

Most people do this not because it is the best option — but because it is the familiar one.

For many investors, there may be a more efficient long-term option. It has existed since 1991. It offers the shortest lock-in of any tax-saving investment, equity-linked growth potential, and one of the most favourable post-redemption tax treatments in the Indian tax system.

It is called ELSS — Equity Linked Savings Scheme.

If you invest ₹1.5 lakh in an ELSS fund under the old tax regime, a taxpayer in the 30% tax bracket may save up to ₹46,800 in taxes. This means your actual investment cost becomes much lower while your money continues to stay invested for long-term growth.

This article covers what ELSS is, exactly how the tax saving works, how it compares to every other tax-saving option, the top ELSS funds worth researching in 2026, and the five mistakes that quietly reduce your benefit.

Important Tax Regime Note: The tax deduction for ELSS investments is available only under the old tax regime. Under the new default tax regime (Section 202, Income Tax Act, 2025), deductions under Chapter VIII — including deductions for ELSS under Section 123 read with Schedule XV — are not available unless specifically permitted. Confirm your tax regime with your tax professional before investing for this benefit.

What Is ELSS? — The Simple Explanation

ELSS stands for Equity Linked Savings Scheme. It is the only category of mutual fund in India that qualifies for a tax deduction under Section 123 of the Income Tax Act, 2025 (the provision that replaced the old Section 80C of the Income Tax Act, 1961).

Note for readers familiar with the old Act: “Section 80C” is the commonly used term under the Income-tax Act, 1961. Under the Income-tax Act, 2025, the corresponding deduction is governed by Section 123 read with Schedule XV. The deduction limit of up to ₹1,50,000 per tax year remains broadly similar.

Key facts about ELSS:

Minimum 80% of the corpus must be in equity and equity-related instruments per SEBI regulations — this is what gives it growth potential and market risk
Mandatory 3-year lock-in from the date of each investment — the shortest among all Section 123/80C options
In a SIP, each monthly instalment has its own 3-year lock-in clock
After 3 years, there is no exit load and no restriction — redeem fully, partially, or stay invested

How the Tax Saving Works — With Exact Numbers

Step-by-step under the old tax regime:

You invest ₹1,50,000 in an ELSS fund during the financial year (April to March)
This ₹1,50,000 is deducted from your gross taxable income under Section 123, ITA 2025
Your tax is calculated on the reduced income
The saving depends on your income slab:

Tax Bracket	Tax Rate (incl. 4% cess)	Tax Saved on ₹1.5L	Your Net Cost of ₹1.5L Investment
10% slab	10.4%	₹15,600	₹1,34,400
20% slab	20.8%	₹31,200	₹1,18,800
30% slab	31.2%	₹46,800	₹1,03,200

The 30% bracket investor’s ₹1.5 lakh investment effectively costs only ₹1,03,200 after the tax saving. That ₹46,800 advantage exists on Day 1, before the fund earns a single rupee. No other investment product in India offers this kind of immediate head start.

ELSS vs All Other Section 80C / Section 123 Options

Option	Lock-in	Expected Returns	Tax on Maturity / Gains	Best For
ELSS Mutual Fund	3 years	12–15% p.a. (historical equity, not guaranteed)	12.5% LTCG above ₹1.25L	Growth-oriented, 5+ year horizon
PPF	15 years	7.1% p.a. (fixed)	Tax-free on maturity	Conservative, very long-term
Tax-saving FD	5 years	6.5–7% p.a.	Taxable at full slab rate	Capital preservation only
NSC	5 years	7.7% p.a. (fixed)	Taxable at full slab rate	Conservative savers
NPS Tier 1	Until age 60	8–12% p.a. (market-linked)	Partial tax-free on exit	Retirement planning only
Life Insurance Premium	Ongoing	Very low (endowment plans)	Generally tax-free on maturity	Pure insurance need only

Historical return figures are illustrative. Equity returns are market-linked and not guaranteed. Past performance does not indicate future results.

For many long-term investors, ELSS may appear more attractive when compared across lock-in, growth potential, and taxation.

Shortest lock-in: ELSS — 3 years vs 5 years (FD/NSC) vs 15 years (PPF)
Highest growth potential: ELSS — equity exposure vs fixed debt returns for all others
Most tax-efficient at redemption: ELSS — 12.5% LTCG with ₹1.25L annual exemption vs full slab rate on FD/NSC interest

The only situation where PPF legitimately beats ELSS: if you genuinely cannot tolerate any market risk and need guaranteed, tax-free returns. For everyone else with a 5-year-plus horizon,

ELSS may offer advantages in lock-in period, long-term growth potential, and post-tax efficiency for investors comfortable with equity risk. .

How ELSS Gains Are Taxed After the Lock-In (ITA 2025)

This is what most investors get wrong — they assume ELSS gains are heavily taxed at redemption. They are not.

Situation	Gain Type	Tax Rate	Annual Exemption
During lock-in (first 3 years)	Cannot redeem	N/A	N/A
After 3 years	LTCG (Long-Term Capital Gains)	12.5% on gains above ₹1.25L	₹1.25 lakh fully exempt per year

Source: Section 198, Income Tax Act, 2025 (as amended by Finance Act, 2026) — incometaxindia.gov.in

Practical example — the staged redemption advantage:

You invested ₹5 lakh in ELSS over 5 years. Portfolio grows to ₹9 lakh. Total gains: ₹4 lakh.

If you redeem in 4 stages — ₹1 lakh of gains per year — each year’s gains fall below the ₹1.25 lakh annual exemption. Result: zero LTCG tax paid on ₹4 lakh of gains.

Compare this to a tax-saving FD where interest is added to income and taxed at up to 30% every single year. The post-tax advantage of ELSS over fixed-income 80C instruments compounds significantly over time.

Tax planning should always be done with a SEBI-registered Investment Advisor or Chartered Accountant. The above is illustrative.

Top ELSS Funds to Research in 2026

The funds below are based on verified performance data as of early 2026, sourced from AMFI. This is a starting point for your own research — not a buy recommendation.

Fund Name	1-Year Return	3-Year Return	5-Year Return	AUM
SBI ELSS Tax Saver Fund	11.58%	25.16%	20.43%	₹32,609 crore
HDFC ELSS Tax Saver Fund	12.99%	22.31%	20.28%	₹17,163 crore
Motilal Oswal ELSS Tax Saver	14.48%	21.89%	18.57%	₹4,341 crore
Mirae Asset ELSS Tax Saver	~13%	~21%	~19%	Large AUM
Parag Parikh ELSS Tax Saver	~12%	~22%	~20%	Growing AUM
DSP ELSS Tax Saver	~13%	~21%	~18%	Established fund

Past performance is not indicative of future results. All return figures are historical. Verify current NAV, expense ratio, and portfolio at amfiindia.com before making any investment decision.

What to look at beyond 1-year returns:

5-year CAGR — far more reliable than 1-year figures, which can reflect a single good market run
Expense ratio — for Direct plans, lower is better; typically 0.5–1% less than Regular plans
Fund size (AUM) — very small funds can have liquidity issues; very large funds may struggle to be nimble
Consistency — compare against the Nifty 50 benchmark across multiple periods, not just the best year

How to verify fund data yourself: Go to amfiindia.com and search for any ELSS fund. AMFI publishes NAV history, expense ratios, and portfolio details for every scheme — free of charge.

SIP or Lump Sum — Which Is Better for ELSS?

Both are valid. The right choice depends on your situation:

Factor	Lump Sum	SIP
Best timing	April (start of FY) — not January or March	April onwards — full year averaging
Tax benefit	Full ₹1.5L in current FY immediately	Full ₹1.5L claimed if SIP completes by 31 March
Rupee cost averaging	No — single purchase price	Yes — more units when NAV is low
Lock-in	Single 3-year clock	Each instalment has its own 3-year clock
Best for	Investors with bonus or windfall cash	Salaried investors investing from monthly income

The most costly mistake in ELSS investing: waiting until January, February, or March to invest. Investing at year-end means you buy at whatever market level is current — often elevated when thousands of last-minute investors are all buying simultaneously.

Better approach: Start a ₹12,500/month ELSS SIP in April. You invest ₹1.5 lakh across 12 months, get full rupee cost averaging, and your 3-year lock-in clock starts ticking 11 months earlier than a March lump sum investor.

Five Mistakes That Quietly Reduce Your ELSS Benefit

Mistake 1 — Stopping at ₹1.5 lakh. The Section 123 deduction limit is ₹1.5 lakh, but you can invest more. Additional amounts above ₹1.5 lakh do not get the deduction but still benefit from equity returns and the 12.5% LTCG tax treatment.

Mistake 2 — Choosing the Dividend option. ELSS dividends are taxable as ordinary income at your full slab rate — up to 30%. The Growth option reinvests everything into the fund, allowing full compounding. Many long-term investors prefer the Growth option for compounding benefits , not Dividend.

Mistake 3 — Investing in a Regular plan. Regular plans pay distributor commission from your expense ratio — typically 0.5–1% per year more than Direct plans. Over 10 years, this quietly compounds into a meaningful loss of gains. Use Direct plans unless you are paying for genuine personalised advisory services.

Mistake 4 — Redeeming exactly at 3 years. Three years is the minimum, not a signal to exit. If your financial goal is still 5 or more years away and the fund is performing well, staying invested continues the compounding. Many investors who redeemed at exactly 3 years and reinvested in a fresh ELSS simply reset their clock unnecessarily.

Mistake 5 — Spreading ₹1.5 lakh across 4 or 5 ELSS funds. Four funds to save ₹1.5 lakh adds no meaningful diversification — ELSS funds are already diversified equity portfolios. It creates portfolio overlap, complexity at tax time, and unnecessary monitoring burden. Two well-chosen ELSS funds are sufficient.

Key Takeaways

ELSS is the only mutual fund category eligible for deduction under Section 123, ITA 2025 (equivalent of old Section 80C) — up to ₹1,50,000 per tax year.
Tax saving is available only under the old tax regime (Section 202, ITA 2025). Confirm your regime before investing.
30% bracket investors save ₹46,800 in tax annually — a real, upfront Day 1 advantage.
ELSS has the shortest lock-in of all 80C/Section 123 options — just 3 years.
After lock-in, gains are taxed as LTCG at 12.5% with ₹1.25 lakh exempt per year (Section 198, ITA 2025) — far more favourable than FD or NSC interest taxation.
Start your ELSS SIP in April, not January or March. Spread ₹1.5 lakh over 12 months at ₹12,500/month.
Always choose Direct plan, Direct plans generally have lower expense ratios than Regular plans. Growth option.

Frequently Asked Questions

Q1: What is ELSS and how does it save tax?

ELSS stands for Equity Linked Savings Scheme — the only mutual fund eligible for a tax deduction under Section 123 of the Income Tax Act. You can invest up to Rs 1.5 lakh in an ELSS fund per financial year and claim that amount as a deduction from your taxable income. If you are in the 30% tax bracket, this saves you Rs 46,800 in direct tax annually under old regime.

Q2: What is the lock-in period for ELSS mutual funds?

ELSS has a mandatory 3-year lock-in period from the date of each investment — the shortest lock-in among all Section 123 options. In a SIP, each monthly instalment has its own 3-year lock. After the lock-in ends, you can redeem fully, partially, or stay invested. There is no restriction or exit load after 3 years.

Q3: Is ELSS better than PPF for tax saving?

For investors with a 5-year or longer horizon who can tolerate equity market risk, ELSS is generally superior to PPF. ELSS has a much shorter lock-in (3 years vs 15 years), historically higher returns (12-15% vs 7.1% for PPF), and post-redemption gains taxed at only 12.5% with Rs 1.25 lakh exempt annually. PPF offers guaranteed, tax-free returns — better for very conservative investors who cannot accept any market risk.

Q4: Can I invest in ELSS through SIP?

Yes — SIP is actually the recommended way to invest in ELSS for salaried investors. Start a monthly SIP in April at the beginning of the financial year rather than investing a lump sum in January or March. This gives you rupee cost averaging across the full year, spreads the 3-year lock-in clock across monthly instalments, and removes the emotional pressure of last-minute tax-saving decisions.

Q5: How are ELSS returns taxed after redemption?

After the 3-year lock-in, gains from ELSS are treated as Long-Term Capital Gains (LTCG). The first Rs 1.25 lakh of LTCG per financial year is completely exempt from tax. Gains above Rs 1.25 lakh are taxed at 12.5%. This is significantly more favourable than a tax-saving FD, where interest is taxed at your full income slab rate of up to 30% every year.

Conclusion

ELSS is not a complicated product. It is an equity mutual fund with a 3-year lock-in that saves you up to ₹46,800 in tax every year — but only if you are under the old tax regime.

Most investors who overlook it do so out of habit with PPF or FDs — not because those options are better. When you compare lock-in periods, historical growth potential, and post-redemption tax treatment side by side, ELSS is the superior Section 80C (now 123) equivalent instrument for any investor with a 5-year-plus horizon who can accept equity market risk.

Start in April. Use a SIP. Choose a Direct plan. Choose the Growth option. Pick two well-researched funds. Then let compounding — and the annual tax saving — do the work for you.

Starting early can make a significant difference in long-term investing. However, before investing in ELSS, investors should carefully evaluate their financial goals, tax regime, investment horizon, and risk tolerance.

Official References

Income Tax Act, 2025 — incometaxindia.gov.in (Sections 123, 198, 202, Schedule XV)
SEBI (Mutual Funds) Regulations, 1996
AMFI — Fund Data and NAV History

About the Author: CA Ajay Khandelwal is a Chartered Accountant with over 21 years of experience in taxation, compliance, and financial advisory.

Continue reading: This article is part of our Mutual Funds India 2026 Complete Guide at aspirixwriters.com/mutual-funds/

Mutual Funds India 2026: Complete Beginner’s Guide

Disclaimer: For educational purposes only — not personal financial or tax advice. Mutual fund investments are subject to market risks; ELSS returns are not guaranteed. Tax benefits apply only under the old tax regime under the Income Tax Act, 2025. Tax laws may change — verify current rules at incometaxindia.gov.in and consult a SEBI-registered Investment Advisor at: sebi.gov.in and your Chartered Accountant before investing.

Author

CA Ajay Khandelwal is a Chartered Accountant and financial expert with over 21 years of experience in taxation, compliance, and business advisory. As a key expert at AspirixWriters, he provides practical insights on income tax, financial planning, and regulatory matters, helping readers make informed financial decisions.

Author profile CA. Ajay Khandelwal

Income Tax India 2026 : A Complete Guide