ELSS Funds in the New Tax Regime: Still a Good Investment?

Date : March 20,2025

For years, Equity-Linked Savings Schemes (ELSS) have been a popular choice for investors looking to save taxes under Section 80C of the Income Tax Act, 1961 while benefiting from equity market growth. However, with the New Tax Regime no longer offering these tax benefits, the question arises: Do ELSS mutual funds still hold significance in today’s investment landscape?

The short answer? Absolutely. While tax savings are a key attraction, ELSS funds offer much more and continue to be a powerful investment choice for those prioritising long-term growth.

Benefits of ELSS Funds in the Old Regime

For investors opting for the Old Tax Regime, ELSS mutual funds continue to provide a valuable tax-saving advantage. Here’s why:

Tax Benefits: Investments in ELSS funds qualify for deductions under Section 80C of the Income Tax Act, 1961, allowing a reduction in taxable income by up to ₹1.5 lakh in a financial year.
Lowest Lock-in Period: Among all tax-saving investment options, ELSS mutual funds have the shortest lock-in period of just three years.
SIP: Unlike most tax-saving options, ELSS allows SIP investments, promoting disciplined investing and cost averaging.

These benefits not only help in tax savings but also enable wealth creation through equity investments, making ELSS Funds a compelling choice for investors under the Old Tax Regime.

ELSS Funds: Much More Than Their Tax-Saving Benefits

The removal of Section 80C benefits under the New Tax Regime has not diminished the value of ELSS Funds. Its inherent discipline through the lock-in makes it a compelling investment option for those seeking financial growth, regardless of tax benefits. ELSS is not just about saving taxes—it’s about staying invested, building wealth, and making disciplined decisions that pay off over time.

The Benefit of ELSS’s Lock-in: Unlock The Power of Disciplined Investing

One of the most overlooked yet significant advantages of ELSS mutual funds is its mandatory three-year lock-in period, which encourages disciplined investing and prevents impulsive reactions to market volatility.

Market corrections often trigger Loss Aversion Bias, causing investors to panic and exit prematurely. However, historical data demonstrates that staying invested through the full lock-in period significantly improves investment outcomes:

Particulars	Premature exit when fund falls down by 25% or more within 1 Year	If stayed invested till 3 Years (Lock-In Period)
No. of Instances	983	983
Average Profit / Loss on Redemption	-25.70%	33.41%
Average Holding Period (in days)	196.77	1095
Average Ending Value	₹742.95	₹1,334.12
Median Ending Value	₹747.98	₹1,383.45
Probability of Loss (Chance of an investor losing money on redemption)	100%	17.40%

Source: ICRA, Internal Research. The period for calculation is 1st April 2001 to 28th February 2025. Data is based on the average ELSS category daily returns, which is calculated as the simple average of daily returns of Regular Plans (Growth Option) of all active ELSS funds on a particular day during this period. Past performance may or may not be sustained in the future and is not an indication of future returns.

From the above table which compares two scenarios, exiting early after a temporary 25% loss versus staying invested for the entire lock-in period, the following points are noteworthy:

Exiting early guarantees a loss: Those who panicked and exited after a 25% drop ended up losing money 100% of the time. By triggering their redemptions, they converted unrealized “paper” losses into actual losses, not giving their investments time to recover.
Drastic reduction in loss probability: The probability of loss, which was 100% for those who exited early, fell drastically to just 17.4% when investors stayed invested for the full period. This highlights how patience significantly reduces downside risk.

Rolling Returns	ELSS Category	Nifty 500 TRI
1-Year	18.55%	17.19%
3-Year	16.77%	15.24%
5-Year	15.77%	14.62%

Source: ICRA, Internal Research. The period for calculation is 1st January 2015 to 28th February 2025. For ELSS Category, Average of the average of daily rolling returns of Regular Plans (Growth Option) of all active ELSS funds on a particular day during this period is calculated for the different rolling periods. For Nifty 500, the average of daily rolling returns of the Index is considered. Past performance may or may not be sustained in the future and is not an indication of future return.

It can be noted from the above table that ELSS funds have outperformed the broader market. While short-term market fluctuations are inevitable, the rolling return data reaffirms that the inherent discipline of ELSS funds rewards those who stay invested.

Why Discipline Matters in ELSS Investing?

The three-year lock-in period of ELSS is not just a regulatory requirement—it serves as a behavioral advantage. It prevents panic-driven exits, forces investors to think long-term, and allows portfolios to recover from temporary market fluctuations.

Investors who react emotionally to market declines often end up buying high and selling low—a pattern that erodes wealth over time. ELSS removes this temptation, ensuring that investments are given sufficient time to benefit from market recoveries and compounding growth.

Growth Potential with Equity Exposure

ELSS mutual funds primarily invest in equities, providing exposure to the stock market’s long-term growth potential. Historically, equity markets have rewarded patient investors with superior returns compared to traditional investment options like FDs. For long-term investors, this makes ELSS mutual funds a valuable tool for financial growth, regardless of tax benefits.

Conclusion

While the tax benefits in ELSS funds are not available in the new tax regime, its core strength as an equity-based investment remains intact. By fostering patience and discipline, ELSS funds create a structured approach to equity investing. This approach is particularly valuable in volatile markets, where staying invested is often the difference between success and failure.

ELSS is more than just a tax saving investment option—it’s a financial habit that encourages investors to stay committed, ride market cycles, and build lasting wealth.

FAQs

1) Is ELSS still a good investment under the New Tax Regime?

Yes, even though ELSS funds no longer offer tax benefits under the new regime, they remain an excellent choice for long-term wealth creation due to their equity exposure, disciplined investing, and potential for higher returns.

2) How does the ELSS lock-in period benefit investors?

The lock-in period prevents impulsive decisions and ensures investors remain invested for at least three years. This allows their investments to recover from short-term market fluctuations and benefit from compounding returns.

3) Can ELSS be a good alternative to regular equity mutual funds?

Yes, ELSS funds work like diversified equity mutual funds but with a mandatory three-year lock-in, which fosters long-term investment discipline. Investors who struggle with emotional exits might benefit from this structure.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

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