Making a mutual fund investment and enjoying the returns is indeed attractive. But do you know what happens to the taxes that investors pay on their income? Do they get any tax benefits for investing in mutual funds?

When you invest in a tax-saving ELSS mutual fund, you can claim deductions under Section 80C of the Indian Income Tax Act, 1961, reducing your taxable income.

The fact is, if the mutual fund investment is done in a tax saving mutual fund, the investors get tax benefits under section 80C of the Indian Income Tax Act, 1961.

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What are Tax Saving Mutual Funds?

An Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund in India. It qualifies for deductions up to Rs.1.5 lakh under Section 80C. ELSS funds invest primarily in equities or stocks. They have a mandatory three-year lock-in, shorter than other tax-saving options like PPF. This lock-in encourages long-term discipline. ELSS combines the potential for returns with tax benefits, making it popular for tax-efficient growth. However, it is crucial to assess your risk tolerance and financial goals due to equity market exposure.

Top 10 Tax Saving Mutual Funds in India 2025

The following is the list of top 10 tax saving mutual funds in India:

Note: Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

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How do Tax Saving Mutual Funds work?

ELSS Mutual Funds are diversified equity funds designed to promote long-term capital growth along with tax savings. Here is how they operate:

1. Investment Pooling: When an investor contributes to an ELSS fund, their capital is added to a larger pool of assets. This pooled corpus is collectively invested in the equity market to create a diversified portfolio.
2. Diversified Investment Strategy: The fund invests across companies of varying market capitalization large-cap, mid-cap, and small-cap and spans multiple industry sectors. This balanced approach helps maximise potential gains and spreads risk.
3. Risk Mitigation: The ELSS portfolio is structured so that losses in one stock or sector can be offset by gains in others. This balance aims to protect against significant losses while optimizing returns, making it a risk-adjusted strategy for long-term growth.
4. Dual Benefits: ELSS funds provide the potential for equity-linked returns alongside tax benefits. Investments up to Rs.1.5 lakh are eligible for deductions under Section 80C of the Indian Income Tax Act.
5. Lock-in Period: Investments in ELSS are locked in for three years—the shortest lock-in among tax-saving options—which encourages investors to stay invested for long-term growth.

Example

When you invest in an ELSS fund, your capital joins that of other investors to create a larger pool of funds. The fund manager allocates this capital across various sectors to spread risk and seize growth opportunities, such as:

1. 40% in Information Technology: Targeting tech companies for rapid growth.
2. 30% in Financial Services: Investing in banks for stability and potential returns.
3. 20% in Consumer Goods: Capitalising on steady demand in the retail sector.
4. 10% in Healthcare: Focusing on pharmaceuticals due to rising health awareness.
5. 5% in Energy: Including both traditional and renewable energy firms.
6. 3% in Materials: Supporting companies providing essential raw materials.
7. 2% in Industrials: Targeting manufacturing and infrastructure firms.

This diversified approach helps manage risk; gains in one sector can offset losses in another. As an investor, you benefit from potential high returns and tax savings. The ELSS fund has a mandatory three-year lock-in period, encouraging long-term investment. After this period, you can withdraw your funds or continue investing in further growth.

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Types of Equity-linked Savings Scheme (ELSS)

There are two types of schemes under the tax saving mutual funds: One is the dividend scheme and the other is the growth scheme.

While the dividend schemes allow the investors to get an extra income in the form of dividends declared by the respective fund house from time to time as per the availability of the distributable surplus.

The growth schemes generate long-term capital appreciation for the investors which can be redeemed at the end of the maturity period. The dividends are not subject to tax or lock-in periods and can be withdrawn or reinvested in the fund and will become eligible for tax benefits. There are no such provisions for the growth schemes under ELSS.

Features of Tax Saving Mutual Funds

The following are the exclusive features of the equity-linked savings schemes that make them a profitable investment option for the investors:

1. If you can’t afford to invest large sums in the fund then you can start investing in ELSS with Rs.500 only. Unlike PPF and NSC, there is no upper limit of investment in ELSS.
2. While there is no upper limit, only investments worth Rs.100,000 will be eligible for tax benefits.
3. Investments made in tax saving mutual funds come with a lock-in period of 3 years.
4. Since ELSS’ are mutual funds in nature, investments made in these schemes are prone to market risks which can be either low, medium or high based on where the funds are invested.
5. Typically, tax saving mutual funds are ELSS’ (Equity Linked Savings Schemes) and open-ended in nature.
6. These mutual funds offer nomination facilities to the subscribers.
7. Most of the ELSS schemes come with entry and exit loads. These are the fees that are charged by the providers on purchase/sale/redemption/transfer of the fund units by the investors.

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Best ELSS Mutual Funds to Invest in 2025

Making a mutual fund investment and enjoying the returns is indeed attractive. But do you know what happens to the taxes that investors pay on their income? Do they get any tax benefits for investing in mutual funds?

When you invest in a tax-saving ELSS mutual fund, you can claim deductions under Section 80C of the Indian Income Tax Act, 1961, reducing your taxable income.

The fact is, if the mutual fund investment is done in a tax saving mutual fund, the investors get tax benefits under section 80C of the Indian Income Tax Act, 1961.Check Your Credit Score for FREE

What are Tax Saving Mutual Funds?

An Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund in India. It qualifies for deductions up to Rs.1.5 lakh under Section 80C. ELSS funds invest primarily in equities or stocks. They have a mandatory three-year lock-in, shorter than other tax-saving options like PPF. This lock-in encourages long-term discipline. ELSS combines the potential for returns with tax benefits, making it popular for tax-efficient growth. However, it is crucial to assess your risk tolerance and financial goals due to equity market exposure.

Top 10 Tax Saving Mutual Funds in India 2025

The following is the list of top 10 tax saving mutual funds in India:

Note: Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.Check Your Credit Score for FREE

How do Tax Saving Mutual Funds work?

ELSS Mutual Funds are diversified equity funds designed to promote long-term capital growth along with tax savings. Here is how they operate:

1. Investment Pooling: When an investor contributes to an ELSS fund, their capital is added to a larger pool of assets. This pooled corpus is collectively invested in the equity market to create a diversified portfolio.
2. Diversified Investment Strategy: The fund invests across companies of varying market capitalization large-cap, mid-cap, and small-cap and spans multiple industry sectors. This balanced approach helps maximise potential gains and spreads risk.
3. Risk Mitigation: The ELSS portfolio is structured so that losses in one stock or sector can be offset by gains in others. This balance aims to protect against significant losses while optimizing returns, making it a risk-adjusted strategy for long-term growth.
4. Dual Benefits: ELSS funds provide the potential for equity-linked returns alongside tax benefits. Investments up to Rs.1.5 lakh are eligible for deductions under Section 80C of the Indian Income Tax Act.
5. Lock-in Period: Investments in ELSS are locked in for three years—the shortest lock-in among tax-saving options—which encourages investors to stay invested for long-term growth.

Example

When you invest in an ELSS fund, your capital joins that of other investors to create a larger pool of funds. The fund manager allocates this capital across various sectors to spread risk and seize growth opportunities, such as:

1. 40% in Information Technology: Targeting tech companies for rapid growth.
2. 30% in Financial Services: Investing in banks for stability and potential returns.
3. 20% in Consumer Goods: Capitalising on steady demand in the retail sector.
4. 10% in Healthcare: Focusing on pharmaceuticals due to rising health awareness.
5. 5% in Energy: Including both traditional and renewable energy firms.
6. 3% in Materials: Supporting companies providing essential raw materials.
7. 2% in Industrials: Targeting manufacturing and infrastructure firms.

This diversified approach helps manage risk; gains in one sector can offset losses in another. As an investor, you benefit from potential high returns and tax savings. The ELSS fund has a mandatory three-year lock-in period, encouraging long-term investment. After this period, you can withdraw your funds or continue investing in further growth.Check Your Credit Score for FREE

Types of Equity-linked Savings Scheme (ELSS)

There are two types of schemes under the tax saving mutual funds: One is the dividend scheme and the other is the growth scheme.

While the dividend schemes allow the investors to get an extra income in the form of dividends declared by the respective fund house from time to time as per the availability of the distributable surplus.

The growth schemes generate long-term capital appreciation for the investors which can be redeemed at the end of the maturity period. The dividends are not subject to tax or lock-in periods and can be withdrawn or reinvested in the fund and will become eligible for tax benefits. There are no such provisions for the growth schemes under ELSS.

Features of Tax Saving Mutual Funds

The following are the exclusive features of the equity-linked savings schemes that make them a profitable investment option for the investors:

1. If you can’t afford to invest large sums in the fund then you can start investing in ELSS with Rs.500 only. Unlike PPF and NSC, there is no upper limit of investment in ELSS.
2. While there is no upper limit, only investments worth Rs.100,000 will be eligible for tax benefits.
3. Investments made in tax saving mutual funds come with a lock-in period of 3 years.
4. Since ELSS’ are mutual funds in nature, investments made in these schemes are prone to market risks which can be either low, medium or high based on where the funds are invested.
5. Typically, tax saving mutual funds are ELSS’ (Equity Linked Savings Schemes) and open-ended in nature.
6. These mutual funds offer nomination facilities to the subscribers.
7. Most of the ELSS schemes come with entry and exit loads. These are the fees that are charged by the providers on purchase/sale/redemption/transfer of the fund units by the investors.

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Benefits of Tax Saving Mutual Funds

Tax saving mutual funds come with a number of benefits for the investors. Some of the vital ones are as follows:

1. Potential for Higher Returns: ELSS funds invest in equities, providing the potential for higher returns than traditional tax-saving options such as PPF and National Pension Scheme (NPS). The net asset value (NAV) can fluctuate, allowing for significant capital appreciation as stock prices rise.
2. Tax Benefits: Investments in ELSS funds are eligible for tax deductions of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, making them an attractive option for individuals looking to save on taxes while investing.
3. Flexibility in Withdrawals: After the three-year lock-in period, investors have the flexibility to make partial or lump-sum withdrawals, providing access to funds when needed.
4. Diversified Portfolio: ELSS funds typically invest across various sectors and market capitalisations, which helps reduce risk. This diversification ensures that investors can take advantage of growth opportunities without being overly exposed to any single investment.
5. Two Investment Options: Investors can choose between a Systematic Investment Plan (SIP) for smaller, regular contributions or a lump sum for larger one-time investments, catering to different investment preferences.
6. Professional Management: Managed by professional fund managers, ELSS funds are ideal for individuals with limited market knowledge. The expertise of fund managers can enhance investment decisions and portfolio performance.
7. Transparency: ELSS funds provide regular updates on portfolio performance and market value, ensuring transparency for investors and allowing them to track their investments effectively.
8. Shorter Lock-In Period: ELSS mutual funds have a mandatory lock-in period of just three years, making them more liquid compared to other tax-saving options like Public Provident Fund (PPF), which has a minimum maturity of 15 years.

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Limitations of Investing in Tax Saving Mutual Funds

These are few limitations of investing in ELSS funds:  

1. Market Volatility: These funds are highly susceptible to market fluctuations. Economic downturns and political instability can significantly impact stock prices.
2. High Equity Exposure: ELSS funds must invest at least 80% of their assets in equities, increasing overall market risk. Careful fund selection is crucial to mitigate potential losses.
3. Liquidity Constraints: ELSS funds have a three-year lock-in period, restricting access to your capital during this time.
4. Limited Flexibility: The lock-in period limits withdrawal options. While ELSS offers the shortest lock-in among tax-saving instruments, it still restricts immediate access to funds.
5. Long-Term Commitment: Although risks may decrease over time, short-term investments can be volatile. A longer investment horizon is advisable for maximising potential growth.

Who should Invest in Tax Saving Mutual Funds?

The following should ideally invest in ELSS Mutual Funds:

1. Long-Term Investors: ELSS funds require a minimum investment commitment of three years, making them ideal for individuals focused on sustained growth. Continuing to invest beyond the lock-in period typically leads to better performance, allowing investors to capitalise on long-term market trends and maximise capital appreciation over time.
2. Salaried Individuals: ELSS funds help balance investment portfolios with the potential for high returns. They offer tax deductions under Section 80C, making them an attractive option for tax savings. Additionally, the lock-in period of just three years provides more liquidity compared to longer commitments required by other products like ULIPs and PPF.
3. Tax-Savvy Investors: ELSS funds are suitable for those looking to save on taxes through equity investments. They are the only tax-saving scheme under Section 80C that features a three-year lock-in period, providing an efficient way to achieve tax benefits.
4. First-Time Investors: ELSS funds are ideal for new investors seeking exposure to equity markets while enjoying tax benefits. The three-year lock-in period encourages long-term commitment and discipline, preventing impulsive withdrawals during market fluctuations. Investing through Systematic Investment Plans (SIPs) allows for regular contributions and benefits from rupee cost averaging.

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Factors to Consider Before Investing in Tax Saving Mutual Fund

When looking for the best ELSS funds to invest consider the following factors:

1. Investment Goals: Clearly define your investment goals, especially if your primary objective is tax savings. ELSS funds can be a suitable choice for those looking to save on taxes under Section 80C.
2. Lock-in Period: ELSS funds have a mandatory lock-in period of three years. During this time, investors cannot redeem their holdings, so be prepared to keep your investment locked in for this duration.
3. Investment Horizon: A longer investment horizon (preferably over five years) is advisable to better manage market volatility and maximise potential returns.
4. Risk of Non-Guaranteed Returns: ELSS funds do not guarantee returns as they rely on the performance of underlying equities. Be aware that the returns can fluctuate based on market conditions.
5. Portfolio Risk Exposure: Since ELSS funds primarily invest in equities, assess the fund’s portfolio exposure to ensure you’re comfortable with the level of risk associated with high volatility.
6. Historical Performance: Review the fund’s historical performance to gauge its consistency. Compare its returns against benchmarks to evaluate how well it has performed relative to the market.
7. Fund Manager’s Track Record: Investigate the fund manager’s experience and track record in managing similar funds. A skilled manager can significantly influence a fund’s performance.
8. Expense Ratio: Consider the fund’s expense ratio, which can affect your overall returns. Lower expense ratios are generally more favourable.
9. Diversification: Diversify your investments across multiple funds or asset classes to manage risk effectively. Relying on a single ELSS fund may expose you to higher volatility.

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Tax Saving Mutual Funds ELSS vs PPF vs FD

The following are the differences between ELSS, PPF, and FD:

How do Tax Saving Mutual Funds Work?

The following are the details about how tax saving mutual funds perform:

1. Tax Saving Mutual Funds are almost similar to multi-cap equity funds
2. Tax Saving Mutual Funds have three years lock-in period
3. The minimum amount of equity should be 65% of asset that holds tax saver mutual funds
4. Remaining amount can be invested in fixed-income instruments like bonds or other money market instruments
5. The NAV (net asset value) of the scheme increases is the scheme investment are profitable
6. investors can sell their units at the higher NAV to book profits from their investment
7. The taxation rules are same for both ELSS funds and equity mutual funds
8. Short-term goals are not possible for tax saving mutual funds due to the lock-in period

1. In a financial year, long capital term capital gains from tax saver mutual funds are tax-free up to Rs.1 lakh
2. Gains are taxable at 10% with no indexation benefits in excess of Rs.1 lakh during the fiscal year.

How to Start an ELSS Fund SIP Online

Follow the steps below to open ELSS Mutual Fund SIP online:

1. Step 1: Open a Demat Account. Register with a brokerage or financial institution if you don’t already have a Demat account.
2. Step 2: Research and choose the ELSS fund that matches your investment goals and risk profile.
3. Step 3: Opt for the Systematic Investment Plan (SIP), specifying your investment amount and preferred SIP date.
4. Step 4: Link your bank account and enable autopay to automate your SIP payments if you don’t want to miss any payments

GST rate of 18% applicable for all financial services effective July 1, 2017

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FAQs on Tax Saving Mutual Funds

• How should I make payments towards mutual funds?Payments towards mutual funds can either be made by cheque or by direct debit.
• Can you sell ELSS Funds anytime?No, ELSS Funds have a mandatory lock-in period of three years from the date of investment. This lock-in period is part of the tax-saving benefits offered by ELSS Funds, making them a longer-term investment.
• Are ELSS Funds 100% safe?No, ELSS Funds are not 100% safe. While they offer the potential for high returns through equity investments, they carry market risks. Their performance depends on market conditions and the specific stocks and sectors in the fund. However, the long-term nature often helps mitigate volatility.
• Are ELSS Funds tax-free?Investments in ELSS Funds are eligible for tax deductions under Section 80C of the Income Tax Act, up to Rs.1.5 lakh annually. However, returns are subject to Long Term Capital Gains (LTCG) tax if the gains exceed Rs.1.25 lakh in a financial year, taxed at 12.5% without the benefit of indexation.
• The amount that I got was less than what the NAV promised when I checked the statement. How is that possible?NAV, or Net Asset Value, represents the price of each unit of a mutual fund on a specific day. It’s important to note that the NAV can fluctuate daily. Therefore, if you request a withdrawal, the NAV applicable will be the one on the day your request is processed, not the NAV indicated on a previous statement. This can result in the amount you receive being different from what was initially promised.
• Can I switch from one fund to another?Yes, you can switch between ELSS funds within the same fund house. However, you can typically switch only a portion of your investment, not the entire amount. Keep in mind that the switched amount will still be subject to the remaining lock-in period of three years from the original investment date. Always check the specific terms and conditions of your fund for any additional rules regarding switches.
• When should I pay for my SIP?When you apply for an SIP with a particular fund house you will be informed about the dates when the payment is required to be done. You can choose any one of the dates for making a payment as per your convenience.
• Is there a minimum investment requirement for ELSS?Yes, there is a minimum investment requirement for ELSS. Though the minimum investment amount depends on the mutual fund provider, generally, it is around Rs.5,000.
• What is NAV or Net Asset Value of a fund?NAV or Net Asset Value of a mutual fund is the price of each unit of the fund on a particular day. 
• The amount that I got was less than what the NAV promised when I checked the statement. How is that possible?The NAV of a fund can change every day. Therefore, when a request for withdrawal is made by the subscribers, the NAV taken into consideration is that of the day when the request is processed and not of the date when the statement is issued.
• If I invest Rs.2 lakh in a tax saving mutual fund in a year, can I claim tax benefits for the entire investment?No. You can claim income tax benefits only up to Rs.1 lakh to Rs.1.5 lakh in an equity-linked savings scheme or ELSS.
• How much tax will I have to pay on my long-term capital gain?Long term capital gains from ELSS funds are exempt from taxes. In fact, this the biggest advantage of investing in such tax saving mutual funds.
• Can I switch from one fund to another?Yes, while investing in an ELSS you will have the flexibility to switch between funds. However, only a part of the investment can be switched out and not the entire amount.
• How do I know where the money is being invested?If you want to know exactly how your money is invested in an ELSS, you can ask for the portfolio of that scheme as that will contain a detailed breakup of what is invested where. The portfolios of the schemes are also available on the company’s official website.
• Can I withdraw my investment during the lock-in period?No, you can’t withdraw your investment during the lock-in period. Once an investment is made in an ELSS, it cannot be withdrawn till the lock-in period is over.
• Can an NRI invest in ELSS?Yes, NRIs can also invest in tax saving mutual funds like ELSS.

Courtsey To : Bankbazaar

About Post Author

Maria Stanly

aware@srvibes.com

http://www.srvibes.com

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