ELSS Funds: A Quick and Easy Way to Save Tax for FY25!

With the financial year 2024-25 coming to a close, many taxpayers are in a hurry to make the most of their tax-saving investments. If you are still searching for a smart last-minute option, a market expert suggests considering Equity-Linked Savings Schemes (ELSS) mutual funds. They offer a mix of equity investment, a short lock-in period, and the potential for higher returns, making them a standout choice under Section 80C.

What is ELSS Mutual Fund?

ELSS or tax-saving schemes that help you save income tax under Section 80C of the Income Tax Act. You can invest up to Rs.1.5 lakh in a financial year and claim deductions on that amount. ELSS funds mainly invest in stocks, so they come with a higher risk. They also have a mandatory lock-in period of three years. This lock-in period can be helpful for new investors to understand how the stock market works and experience its ups and downs.

Under Section 80C, you can save taxes by investing in options like ELSS funds, NPS, ULIP, PPF, EPF, FD, SSY, and NSC. Among these, ELSS funds have the shortest lock-in period of just three years, while other options require you to keep your money locked in for a longer time.

NPS subscribers can invest in multiple asset classes under one pension fund manager. Up to the age of 50, they can allocate up to 75% of their investments in equity. For those aged 51 and above, the maximum equity investment limit is lower, as per the guidelines available on the NPS Trust website.

The new income tax regime has made Equity Linked Savings Schemes (ELSS) less attractive. Unlike the old regime, the new one does not offer the tax-saving benefits under Section 80C. As a result, fewer investors are showing interest in ELSS mutual funds.

In the 2024 budget, the finance minister changed the income tax slabs under the new tax regime. Unlike the old tax regime, the new one does not allow common deductions like the Section 80C deduction of up to Rs. 1.5 lakh for certain investments and expenses. If you choose the new tax regime, you can only claim two deductions:

• Standard Deduction of Rs. 50,000 from your salary or pension income.
• Section 80CCD (2) for your employer’s contribution to your NPS account.

In the financial year 2025 so far, ELSS funds have seen more money going out than coming in. According to monthly data from the Association of Mutual Funds in India, there was an outflow of Rs.2,030 crore in the first six months. However, from April to February in FY25, these funds received a total inflow of Rs.570 crore.

At present, 360 One Mutual Fund and Navi Mutual Fund offer passive funds in this category. Apart from these, there are about 40 active funds available. On average, both active and passive ELSS funds have given returns of around 15.25%.

SBI Long Term Equity Fund, the oldest ELSS fund and actively managed, has given the highest return of about 24.22% in the last three years. Close behind is the Motilal Oswal ELSS Tax Saver Fund, which provided a return of 23.01% during the same period.

The 360 ONE ELSS Tax Saver Nifty 50 Index Fund and the Navi ELSS Tax Saver Nifty 50 Index Fund are two passive ELSS funds. Both of these funds have been in the market for three years now.