Best ELSS Funds 2025 - Top 10 Tax Saving Mutual Funds

Equity Linked Savings Scheme or ELSS mutual funds are a great investment option for investors those who are looking for wealth generation, getting regular returns and saving taxes at the same time. 

These funds are excellent tax-saving investment options that you can opt for generating profits in the long run. To gain more insights about ELSS mutual funds and their various aspects, read the article below.

What is an ELSS Mutual Fund?

Equity-Linked Saving Scheme (ELSS), commonly referred to as the tax-saving funds, these funds particularly fall under the diversified category of mutual funds. While their maximum exposure (65%) is towards equity and equity-oriented securities, a part of the corpus is also invested in debt instruments.

ELSS is covered under the Section 80C provisions and therefore, you can claim tax deductions of up to Rs 1,50,000 a year. This will help you save up to save Rs 46,800 on a financial year in taxes. These funds come with a mandatory lock-in period of three years, which is the shortest among all other 80C options.

Best ELSS Mutual Funds

The table below shows the top-performing ELSS mutual funds based on the past five year returns:

Features of ELSS Mutual Funds

Here are some of the most important features of ELSS mutual funds,

• These mutual fund schemes diversify their investments by purchasing equities across different sectors, themes and market caps.
• These ELSS mutual funds are having very less lock-in-period and generated higher historical returns as compared to all other 80C investments.
• At least 80% of the fund’s capital investments goes into equity and equity-related instruments, while the remaining amount goes into hybrid and debt instruments.
• They do not have a maximum tenure of investment
• The gains by these schemes are generated is treated as long-term capital gains (LTCG) and thus taxed at 12.5% 
• Tax relief on the invested capital is mentioned under Section 80C of the Income Tax Act

Who Should Invest in Best ELSS Mutual Funds?

Any individual or HUF looking to save up to Rs 46,800 a year on taxes can consider investing in ELSS. However, these funds are suitable only for those who are willing to take some risk towards their investments and can stay invested for at least the mandatory lock-in period of three years.

Investors are advised to stay invested for a minimum of five years to reap the best returns offered by mutual funds. Five years is a reasonable time. You will give your investments the much-needed time to go through the market cycles and provide excellent returns in the long run.

Young investors in the initial years of their professional career can invest with a long-term horizon. ELSS is best suited for young investors as they have time on their side to unleash the power of compounding to the fullest and enjoy high returns while saving on taxes of up to Rs 46,800 a year.

How to Evaluate the Best ELSS Mutual Funds

Fund Returns

Compare the fund’s performance with underlying index to ensure that the fund has been consistent over the past years. Based on these parameters, you can invest in the recommended funds. However, remember that the past performance is not indicative of future returns. The future returns are dependent entirely on the market movements and fund manager’s decisions.

Fund History

Consider the fund houses that have performed consistently by generating additional Alpha over a long period, say 5 years to 10 years. A fund’s performance is reflected based on the quality of stocks in its portfolio and the style if investment.

Expense Ratio

Expense ratio depicts how much of your investment goes towards managing the fund. A lower expense ratio translates into higher take-home returns. Therefore, if there are two funds with a similar track record and asset allocation, you need to choose that fund which has a lower expense ratio.

Financial Ratios

Consider various parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta to analyse the performance of a fund. A fund with a higher standard deviation and beta is riskier than a fund having a lower deviation and beta. Choose funds with a higher Sharpe Ratio as they offer higher returns for the additional risk you take. The fund manager plays a crucial role in managing the investments.

Use ClearTax ELSS Calculator to calculate your invest returns.

Advantages of Investing in ELSS Funds

Dual benefit of tax rebate and wealth growth

ELSS is the only investment option that not only provides tax deductions under the provisions of Section 80C of the Income Tax Act, 1961 but also helps in wealth growth. The equity exposure of the ELSS funds gives you an opportunity to earn excellent returns on staying invested for at least five years.

Shortest lock-in period among Section 80C options

ELSS mutual funds come with a lock-in period of just three years, which happens to be the shortest among all tax-saving investment options under Section 80C of the Income Tax Act, 1961. Therefore, ELSS mutual funds are more liquid as compared to any other Section 80C investment.

Potential to earn inflation-beating returns

ELSS mutual funds are the only Section 80C investment option which has the potential to offer inflation-beating returns. This is what makes ELSS to stand out among all tax-saving investment options.

Expert money management

All mutual funds are handled by finance professionals called fund managers. These are individuals with an excellent track record of managing portfolios and hold various certifications in the field of finance. Every fund manager is backed by a team of market researchers and analysts, who pick only the best-performing securities, which will benefit investors in the long run.

Option to invest monthly

You can start investing in the top ELSS funds using SIP of as low as Rs 100. Moreover, there’s no upper limit on amount of investment.

How can you save Rs 46,800 in tax through ELSS?

ELSS is an excellent tax saving instrument for people who fall in the higher income tax brackets. You can save up to Rs 46,800 if you invest Rs 1.5 lakh per annum in ELSS and are in the 30% income tax bracket. 

However, you get a maximum tax deduction of Rs 1.5 lakh per year in ELSS under Section 80C even if you invest more than this amount.

Table showing how much you save in tax if you fall in the higher income tax slabs:

You can save Rs 31,200 a year in taxes if you invest Rs 1.5 lakh per year in ELSS and fall in the 20% income tax bracket. Moreover, you can save Rs 46,800 a year in taxes if you invest Rs 1.5 lakh per year in ELSS and fall in the 30% income tax bracket. 

Comparison with other Tax Saving Investments

There are several other savings schemes that helps in wealth creation like FD, PPF and NSC to name a few. But the returns from these schemes are taxable. This is where ELSS (Tax Saving Mutual Funds) stands out with its dual-benefit – its returns are generally higher and tax-free. This coupled with a mere lock-in period of 3 years is all the more reason for you to invest in ELSS ( Tax Saving Mutual Funds ) now. Here is a quick glimpse at how ELSS is superior to other commonly used tax-saving investments:

Things Investors Should Consider Before Investing in ELSS Funds

The following are the critical factors that must be considered by investors before they invest in ELSS mutual funds:

Lock-in period

Like any other tax-saving investment option, even ELSS mutual funds come with a lock-in period. It is for three years for ELSS, and it is mandatory. There are no provisions to make premature withdrawals. Therefore, investors must be willing to stay for at least three years from the date of purchase of units.

Risk factor

Since ELSS mutual funds are equity-oriented, they are naturally influenced by the market movements. Furthermore, these funds carry all the risks that an equity fund possesses. Therefore, investors must be willing to assume these risks by investing in ELSS mutual funds. Assessing your risk profile is a must.

SIP and lump sum

All mutual funds allow you to invest in two ways; lump sum or systematic investment plan (SIP). Most investors prefer taking the SIP route since they can stagger their investment over a period. You can invest a small sum on a regular basis via an SIP. Investing through an SIP is advisable since it provides the benefit of rupee cost averaging in the long run. A lump-sum investment is generally not advisable unless there is a significant chance of making overwhelming gains.

Taxability of ELSS Mutual Funds

Since ELSS mutual funds are a class of equity funds, they are necessarily taxed like an equity fund. Any dividends offered by these funds are added to your income and taxed as per the income tax slab you fall under. After 2020, dividends were made tax-free in the hands of investors as the fund house was supposed to pay dividend distribution tax.

Since there is a mandatory lock-in period of three years, there is no question of enjoying short-term capital gains. Therefore, the tax on short-term capital gains on selling the fund units of ELSS mutual funds is non-existent. The long-term capital gains of up to Rs 1.25 lakh a year are made tax-exempt. Any long-term gains exceeding Rs 1.25 lakh are taxed at a rate of 12.5%, and there is no benefit of indexation provided.

Risks Associated with ELSS Funds

Since ELSS mutual funds are equity-oriented funds, they carry the same levels and kinds of risks that any other equity mutual fund carries. However, these risks can be mitigated to a great extent by staying invested for a minimum of five years. Also, the mandatory lock-in period of three years helps significantly in reducing the risk.

Conclusion 

ELSS is suitable for investors with higher risk tolerance as it invests its assets predominantly in equity and equity-related securities. ELSS is an excellent investment for those in the higher income tax brackets. ELSS has the shortest lock-in period among Section 80C investments. Investing in ELSS helps you create wealth and save taxes.