ELSS mutual funds invest mainly in company shares and offer eligible investors a tax deduction under the old tax regime. Each investment has a three-year lock-in, during which you ordinarily cannot withdraw the money.
Often called tax saving mutual funds, these schemes combine equity investing with an eligible tax deduction. The deduction reduces your taxable income, while investment returns depend on the fund’s portfolio and can be negative.
Bajaj AMC offers the Bajaj Finserv ELSS Tax Saver Fund for investors considering this approach. Before choosing it, understand how the deduction, lock-in and investment risks fit your needs.
Sources: SEBI, ELSS guidance; Income Tax Department, deduction guidance; Bajaj AMC, scheme information.
Table of Contents
How do ELSS mutual funds work?
An ELSS mutual fund scheme pools investors’ money and invests according to its stated objective. Its portfolio can include companies of different sizes and across different industries.
You receive units representing your investment. The net asset value (NAV), or value per unit, changes with the value of the scheme’s investments after accounting for expenses.
You can contribute in two ways:
- Lumpsum: Invest an amount in one transaction.
- SIP: Invest periodically, such as every month.
An SIP is a way to invest in the fund, rather than a separate investment product. Under either method, your returns depend on the portfolio’s performance.
Sources: AMFI, scheme categorisation; SEBI, ELSS guidance.
Key Takeaways
- ELSS mutual funds invest at least 80% of their assets in equity and equity-related instruments.
- Eligible investments qualify for a deduction within the shared ₹1.5 lakh annual limit under the old tax regime.
- The ELSS lock-in period is three years from each allotment, including every instalment of a Systematic Investment Plan (SIP).
- Completing the lock-in allows withdrawal but does not automatically return your money or guarantee a profit.
- Gains on redemption are subject to the applicable equity mutual fund tax rules.
What tax benefits do ELSS mutual funds offer?
The ELSS tax benefit reduces your taxable income under the old tax regime. It does not reduce your tax bill by the entire amount invested.
For the tax year 2026–27, the relevant deduction falls under Section 123 read with Schedule XV of the Income-tax Act, 2025. This replaces the familiar Section 80C reference under the Income-tax Act, 1961.
Eligible individuals and Hindu undivided families can claim up to ₹1.5 lakh annually across qualifying investments and payments together. ELSS does not have a separate ₹1.5 lakh allowance.
For example, suppose other eligible payments already use ₹1 lakh of your allowance. Only ₹50,000 remains available for an ELSS deduction, even if you invest ₹80,000. Your actual tax saving depends on your taxable income and applicable tax calculation.
This deduction is unavailable under the new tax regime. Compare your total tax liability under both regimes before choosing one solely for an investment deduction.
The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
The figures shown are for illustrative purpose only
Sources: Income Tax Department, transition guidance; Income-tax Act, 2025, Sections 123 and 202 and Schedule XV, as amended by the Finance Act, 2026.
How does the three-year ELSS lock-in period work?
The ELSS lock-in period starts when units are allotted. Each purchase has its own three-year period, whether you invest a lumpsum or use an SIP.
How does the lock-in apply to an SIP?
Every instalment buys a fresh set of units with its own lock-in. For example, units allotted on 5 October 2026 complete three years on 5 October 2029. Units allotted on 5 November 2026 complete their period on 5 November 2029.
Your entire SIP investment does not become available three years after the first instalment. Only units that have completed their individual lock-in can be redeemed.
The figures shown are for illustrative purpose only
What happens after the ELSS lock-in ends?
You can redeem eligible units fully or partly or continue holding them. There is no automatic repayment, and you do not need to reinvest simply because three years have passed.
Before withdrawing, review your goal, the fund’s suitability and the tax consequences. Three years is the compulsory holding period, rather than an assurance that the investment will have earned a profit.
Source: ELSS scheme documents hosted by AMFI, allotment and redemption provisions.
What are the benefits of ELSS mutual funds?
The benefits of ELSS mutual funds extend beyond the deduction:
- Participation in company growth: Investing in shares provides a route towards long-term wealth creation, although the outcome depends on business and market performance.
- Diversification: Spreading investments across companies reduces dependence on a single business but cannot prevent all losses.
- Professional management: A fund manager selects and monitors investments within the scheme’s mandate.
- Flexible contributions: You can choose an affordable SIP or make lumpsum investments, subject to the scheme’s minimum requirements.
These features are useful only when the investment suits your goal, time horizon and ability to accept losses.
Sources: SEBI, ELSS guidance; AMFI, mutual fund risk guidance.
What risks should you understand before investing in ELSS?
The main risks of ELSS funds come from their investments and the restriction on accessing your money:
- Market losses: Falling share prices can reduce the value of your units.
- Portfolio concentration: Heavy exposure to particular companies or industries makes their performance more influential.
- Company-size exposure: A fund investing more heavily in smaller companies can behave differently from one focused on larger businesses.
- Restricted access: You ordinarily cannot redeem units during the lock-in, even when markets fall or your circumstances change.
Read the scheme’s Riskometer, which displays its assessed risk level. Tax-saving eligibility does not make an equity fund a low-risk investment.
Keep emergency savings and expenses due during the lock-in outside ELSS. For longer-term goals, consider whether you could delay withdrawal during an unfavourable market period.
Sources: AMFI, Risks in mutual funds; SEBI, Riskometer guidance.
How are ELSS returns taxed?
ELSS taxation separates the deduction on your investment from tax on gains when you withdraw.
For a resident individual holding units as investments, ordinary redemption after the three-year lock-in produces long-term capital gains (LTCG). Under the applicable equity mutual fund rules:
- Qualifying LTCG above ₹1.25 lakh in a tax year is taxed at 12.5%, without an inflation adjustment to the purchase cost.
- The ₹1.25 lakh threshold is shared across qualifying equity shares, equity-oriented mutual funds and business-trust units.
- Health and Education Cess of 4% applies to the tax, with surcharge where applicable.
Tax applies to your gain, rather than the entire withdrawal. If units bought for ₹1 lakh are redeemed for ₹1.6 lakh, the gain is ₹60,000. Whether tax arises depends on your total qualifying gains and applicable provisions.
ELSS returns are not automatically tax-free after three years. These capital-gains rules apply under both tax regimes.
Sources: Income Tax Department, Income-tax Act, 2025, Section 198, and capital-gains guidance.
Who should consider investing in ELSS mutual funds?
ELSS may suit you if you have an unused old-regime deduction allowance, want equity exposure and can accept fluctuations in your investment’s value. Before choosing it, check:
- Your remaining deduction allowance: Other eligible payments may already use the annual limit.
- Your investment horizon: The compulsory three-year lock-in may be shorter than the time appropriate for your equity investment.
- Your risk tolerance and finances: Consider both your comfort with losses and whether a loss would affect an essential goal.
- Your existing portfolio: Another equity fund could repeat investments you already hold.
You can invest in ELSS under the new tax regime, but the deduction is unavailable and the lock-in remains. Compare other suitable equity funds before accepting that restriction without the tax benefit.
Sources: SEBI, ELSS guidance; Income-tax Act, 2025, Section 202.
How does ELSS compare with other tax-saving investments?
Different tax-saving products serve different needs. Compare their investment risks and access conditions alongside the deduction.
| Investment | How returns arise | Main holding or access condition |
| ELSS | Market-linked portfolio returns | Three-year lock-in for each allotment |
| Public Provident Fund (PPF) | Government-notified interest, subject to revision | Maturity after 15 complete financial years from the end of the opening year; earlier access follows specified rules |
| Tax-saving fixed deposit (FD) | Interest under the bank’s deposit terms | Five-year lock-in |
| National Savings Certificate (NSC) | Interest under the applicable issue terms | Five-year maturity |
ELSS has a shorter compulsory lock-in than these alternatives, but its value can fall. Choose according to your need for stability, access and equity exposure, rather than the lock-in alone.
The tax treatment of earnings differs between products. An eligible deduction on the amount invested does not mean every product’s returns are tax-free.
Sources: SBI, PPF and tax-saving deposit guidance; NSI, NSC scheme information.
How can you choose the best ELSS fund for your needs?
There is no single best ELSS fund for every investor. Start with your goal and compare schemes on these points:
- Investment strategy: Understand how the fund selects companies and the company sizes it favours.
- Portfolio: Check its largest holdings, industry exposure and overlap with your existing funds.
- Riskometer: Read the current risk level alongside the scheme’s investment objective.
- Expenses: Compare charges because they affect what remains invested.
- Performance context: Where a sufficient record exists, examine different periods and the relevant benchmark instead of selecting only the latest top performer.
- Direct or regular plan: A direct plan excludes distributor commissions and has lower expenses than the regular plan of the same scheme.
A lower expense ratio does not remove investment risk, and a strong past return does not establish what the fund will earn next. These checks also form part of what to consider before investing in mutual funds.
Past performance may or may not be sustained in future
Sources: SEBI, direct and regular plan and Riskometer guidance; AMFI, direct plan information.
How can you invest in ELSS mutual funds?
You can invest through the fund house or an intermediary offering the scheme.
- Complete Know Your Customer (KYC) requirements: Provide the required identity, address and bank-account information.
- Select the scheme and plan: Read its objective, risks, expenses and available options.
- Choose your contribution: Decide between a lumpsum and an SIP based on your budget and remaining deduction allowance.
- Make the payment: Follow the platform’s instructions and check the allotment confirmation.
- Retain your records: Keep statements for tracking lock-in dates and supporting an eligible tax deduction.
Check the minimum investment amount and payment-processing requirements. Near the tax-year deadline, allow time for processing and allotment rather than assuming that submitting a request completes the investment.
Sources: AMFI, KYC and investment guidance; ELSS scheme allotment provisions.
How can Bajaj Finserv ELSS Tax Saver Fund fit into your investment plan?
Your tax-saving investment can also support goals such as retirement or your child’s education. The Bajaj Finserv ELSS Tax Saver Fund seeks long-term wealth creation through equity investing, alongside an eligible deduction under the old tax regime.
The fund considers business fundamentals, management quality and valuation when selecting companies across different sizes. Its InQuBe investment philosophy combines research, data analysis and insights into investor behaviour.
You can invest through a monthly SIP or a lumpsum. Explore Bajaj Finserv ELSS Tax Saver Fund to see how its approach fits your goals, keeping its risks, expenses and three-year lock-in in mind.
FAQs
Can you withdraw ELSS investments before the three-year lock-in ends?
Ordinarily, no. You cannot redeem ELSS units before their lock-in ends, even by paying a penalty. For SIP investments, each instalment has its own three-year period from allotment.
Can you stop an ELSS SIP before three years?
Yes. You can cancel future instalments through your investment platform. Units already allotted remain invested and retain their individual lock-ins.
Does the lock-in apply if you do not claim a tax deduction?
Yes. The three-year lock-in applies whether or not you claim the deduction, including investments made under the new tax regime.
Can you invest more than ₹1.5 lakh in ELSS?
Yes. ₹1.5 lakh is the shared annual deduction limit for eligible investments and payments under the old tax regime, rather than a cap on ELSS investments. Investing more does not increase that deduction.
Can you claim a deduction for the same ELSS investment every year?
No. An eligible investment qualifies for consideration in the year it is made. Continuing to hold those units does not create another deduction in subsequent years.
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