ELSS Mutual Funds and New Tax Regime: What’s Changed?
Equity-Linked Savings Scheme (ELSS) mutual funds were once a favourite tax-saving tool under Section 80C of the Income Tax Act. But with the new tax regime becoming the default from FY 2025-26, ELSS has lost its primary advantage—tax deduction up to ₹1.5 lakh. And it shows.
A 2023 study by the National Institute of Financial Management reported a 25% drop in ELSS inflows since the new regime came into play. With no tax incentive, investors are pulling out money post the mandatory 3-year lock-in period, leading to a sharp decline in category performance.
Why ELSS Funds Are Losing Ground
Here’s what’s driving the shift:
- No 80C Deduction in New Regime: ELSS investments no longer reduce taxable income if you opt for the new tax regime.
- Underperformance: ELSS funds saw a -6.93% return in the last 12 months, and the category faced a 56.39% drawdown, according to recent AMFI data.
- New Regime Thresholds: Taxpayers earning up to ₹7 lakh may not pay any tax at all—without investing in ELSS.
- Flexibility Favoured: With no lock-in, flexicap and index funds are emerging as preferred choices.
- Post-lock-in Exit: Investors now withdraw ELSS units once the 3-year lock-in ends, driven by lack of continued tax benefits.
Comparison: Old vs New Regime for ELSS Investors
| Feature | Old Regime | New Regime (FY 2025–26) |
|---|---|---|
| Tax Deduction on ELSS | Up to ₹1.5 lakh under 80C | Not available |
| Lock-in Period | 3 years | 3 years (still applies) |
| Returns Taxability | LTCG above ₹1 lakh taxable @10% | Same |
| Income up to ₹7 lakh | Taxable if no 80C savings | Fully exempt |
| Recommendation | Suitable for tax planning | Not preferred |
Expert View: ELSS Is Now a Voluntary Risk Play
“In the new regime, ELSS is no longer a tax-saving product—it’s just another equity fund with a 3-year lock-in. Unless the fund consistently outperforms, investors may be better off with diversified flexicap or index funds,” says a SEBI-registered investment advisor.
What Should You Do With Your ELSS?
If you already have ELSS units:
- Complete the 3-year lock-in to avoid exit load or tax penalty.
- Reassess whether you want to continue SIPs under the new regime.
- Switch to alternative equity funds if your goal is pure wealth creation.
If you’re a new investor:
- Don’t invest in ELSS just for tax benefits—they don’t exist in the new regime.
- Compare with low-cost diversified mutual funds with no lock-in.
- Use tools to evaluate long-term CAGR instead of short-term returns.
Smarter Alternatives in the New Tax Landscape
With Section 80C benefits off the table, these options are gaining popularity:
- Flexicap Funds: Dynamic allocation across large, mid, and small caps.
- Index Funds: Lower expense ratios and passive returns linked to Nifty/Sensex.
- SGBs or PPF (if opting for old regime): For conservative long-term savers.
Legal Reference & Budget Link
- As per Budget 2023 & Budget 2024–25, the new tax regime under Section 115BAC does not permit any Chapter VI-A deductions (like Section 80C).
- Confirmed via: Income Tax Department FAQ
Summary
The new tax regime makes ELSS mutual funds less attractive by removing Section 80C benefits. With no tax deductions and poor returns, investors are exiting ELSS post lock-in, shifting toward flexicap and index funds.
FAQs
Q1. Is ELSS still tax-exempt under the old regime?
Yes, if you opt for the old regime, ELSS investments qualify for Section 80C deductions up to ₹1.5 lakh.
Q2. Should I stop my ELSS SIPs?
If you’ve moved to the new tax regime, evaluate whether ELSS fits your risk-return profile, as tax savings no longer apply.
Q3. Are ELSS returns taxable?
Yes. Long-term capital gains above ₹1 lakh are taxed at 10%, irrespective of the regime.
Final Takeaway
ELSS was a solid tax-saving tool. But under the new tax regime, it’s lost its charm. Reassess your portfolio. Choose smarter, more flexible funds suited to wealth creation—not old tax structures.