Best ELSS Funds 2025 - Top 10 Tax Saving Mutual Funds

Equity-Linked Savings Schemes (ELSS) mutual funds are a great investment option for investors who want to generate wealth, earn regular returns, and save taxes. 

These funds are excellent tax-saving investment options that you can opt to generate profits in the long run. 

What is an ELSS Mutual Fund?

Equity-Linked Saving Scheme (ELSS), commonly referred to as tax-saving funds, mainly falls under the diversified category of mutual funds. While their minimum exposure (80%) is into equity and equity-oriented securities, a part of the remaining 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 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.

How ELSS Mutual Funds Works

Equity-Linked Savings Schemes (ELSS) are mutual funds that primarily invest at least 80% in equities. The fund manager and his research team will research equity and debt instruments and invest for you with proper diversification and risk management.

These funds offer tax benefits under Section 80C of the Income Tax Act, allowing annual deductions of up to Rs 1.5 lakh. They come with a 3-year minimum lock-in period, the shortest among tax-saving options. 

ELSS funds provide the dual advantage of tax savings and potentially high returns, though they carry market-related risks due to their equity focus. For flexibility, investors can choose between lump-sum investments or Systematic Investment Plans (SIPs).

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 essential 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 have a very short lock-in period and have generated higher historical returns than all other 80C investments.
• At least 80% of the fund’s capital investments are in equity and equity-related instruments, while the remaining amount is in hybrid and debt instruments.
• They do not have a maximum tenure of investment
• The gains by these schemes are generated and 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 You Invest in the 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 at least five years to reap mutual funds' best returns. Five years is a reasonable time. Doing so will give your investments the much-needed time to experience market cycles and provide excellent returns in the long run.

Young investors can invest with a long-term horizon in the initial years of their professional careers. 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 the 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. Future returns are dependent entirely on market movements and fund managers' decisions.

Fund History:

Consider the fund houses that have consistently generated additional Alpha, say 5 years to 10 years. A fund’s performance is reflected in the quality of stocks in its portfolio and the investment style.

Expense Ratio:

The 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 two funds have similar track records and asset allocation, you must choose the one with a lower expense ratio.

Financial Ratios:

Consider parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta to analyse a fund's performance. A fund with a higher standard deviation and beta is riskier than one with 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.

Advantages of Investing in ELSS Funds

The dual benefit of tax rebate and wealth growth:

ELSS is the only investment option that provides tax deductions under Section 80C of the Income Tax Act of 1961 and helps grow wealth. The equity exposure of the ELSS funds allows you to earn excellent returns on staying invested for at least five years.

Shortest lock-in period among Section 80C options:

ELSS mutual funds have a lock-in period of three years, which is the shortest among all tax-saving investment options under Section 80C of the Income Tax Act of 1961. Therefore, ELSS mutual funds are more liquid than any other Section 80C investment.

Potential to earn inflation-beating returns:

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

Expert money management:

Finance professionals handle all mutual funds called fund managers. These individuals have an excellent track record of managing portfolios and hold various certifications in finance. Every fund manager is backed by a team of market researchers and analysts who pick only the best-performing securities to 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 the amount of investment.

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

ELSS is an excellent tax-saving instrument for people with 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 annually in ELSS and fall in the 20% income tax bracket. Moreover, you can save Rs 46,800 in taxes if you invest Rs 1.5 lakh per year in ELSS and fall in the 30% income tax bracket. 

Comparison of ELSS with other Tax Saving Investments.

Several other savings schemes help create wealth, 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:

Factors Investors Should Consider Before Investing in ELSS Funds

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

Lock-in period:

ELSS mutual funds have a lock-in period like any other tax-saving investment option. It is mandatory and for three years for ELSS. There are no provisions for premature withdrawals, so 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, market movements naturally influence them. 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 the SIP route since they can stagger their investment over time. You can invest a small sum regularly via a SIP. Investing through a 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 these funds offer are added to your income and taxed as per the income tax slab you fall under. After 2020, dividends were made tax-free for 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 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, they carry the same levels and kinds of risks that any other equity mutual fund holds. However, investing for at least five years can significantly mitigate these risks. Also, the mandatory lock-in period of three years helps considerably reduce 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.