--- title: What is a Tax Saving Fund? canonical_url: https://sanchaykaro.com/what-is-a-tax-saving-fund/ last_updated: 2026-05-09T10:23:39+00:00 plugin_version: 1.2.1 --- # What is a Tax Saving Fund? What is a Tax Saving Fund? -------------------------- A **Tax Saving Fund** is another name for an **Equity Linked Savings Scheme (ELSS)** . It is a type of **equity mutual fund** that offers **dual benefits** of **tax saving** and **wealth creation**. These **funds** invest at least **80% of their total assets** in **equity** and **equity-related instruments** of companies across different **market caps** and **sectors**. When you invest in an **ELSS fund**, you get two major advantages: first, you can claim **tax deduction** under **Section 80C** of the **Income Tax Act**, and second, your money grows by investing in the **stock market**, which has historically offered much higher **returns** than traditional options like **FDs** or **PPF**. **Key Highlights:** - **Tax Saving Fund** is also known as **ELSS** (Equity Linked Savings Scheme). - You can claim **tax deduction** up to **₹1.5 lakh** per financial year under **Section 80C**. - These **funds** come with a mandatory **lock-in period** of **3 years** – the shortest among all **tax-saving instruments**. - They are **equity-oriented**, [meaning they carry **market risk** but also offer **higher return**](https://sanchaykaro.com/how-to-choose-the-right-mutual-fund/) **potential**. As per **SEBI rules**, an **ELSS fund** must invest at least 80% of its total assets in **equity** and **equity-related instruments** in accordance with the provisions of the Equity Linked Saving Scheme (ELSS), 2005. The remaining (up to 20%) of the **fund's assets** may be [invested](https://sanchaykaro.com/%f0%9f%9a%80-nfo-radar-ongoing-upcoming-new-fund-offers/) in other instruments such as **debt** or **money market instruments**, depending on the **fund manager's strategy**. --- ### How Does a Tax Saving Fund Work? (Step-by-Step) **ELSS funds** pool money from many **investors**. A professional **fund manager** then invests that money across a basket of **equity stocks** from different **sectors** and **market capitalizations** (large cap, mid cap, small cap). Here is a simple example: Suppose you invest ₹1.5 lakh in an **ELSS fund**. The **fund manager** will allocate at least ₹1.2 lakh (80%) to **equity stocks** of carefully selected companies. The remaining 20% can be in **debt**, **money market instruments**, or cash. Your money is now spread across many growing businesses, which gives you **diversification** and the chance to earn **higher returns**. **ELSS funds** also offer you the flexibility to invest either through a **lump sum** (one-time investment) or through a **Systematic Investment Plan (SIP)** . [**SIP** ](https://www.mutualfundssahihai.com/en/what-is-sip)allows you to invest small amounts regularly (like ₹500 or ₹1000 per month). This helps you benefit from **rupee cost averaging** and brings down the effective cost of investment. --- ### Key Features of Tax Saving Funds (ELSS) FeatureWhat It Means**SEBI Mandate of 80%**At least 80% of assets must be in **equity** and **equity-related instruments**.**Open-ended**After the **lock-in period**, you can buy or sell units on any business day.**Lock-in Period of 3 Years**You cannot withdraw your money before 3 years. This is the **shortest lock-in** among all **Section 80C options**.**Tax Deduction under Section 80C**Invest up to **₹1.5 lakh** per year and reduce your **taxable income** by the same amount (only under the **old tax regime**).**High Return Potential**Since **ELSS funds** invest mostly in **equities**, they offer the potential for **inflation-beating returns** over the long term.**No Maximum Investment Limit**While only ₹1.5 lakh is **tax-deductible**, you can invest any amount.**SIP Option Available**Start with as little as **₹500** per month.**Professional Management**Expert **fund managers** handle all [investment](https://sanchaykaro.com/understanding-all-return-metrics-in-mutual-fund-investing/) decisions.--- ### Benefits of Investing in Tax Saving Funds Here are the main benefits of adding an **ELSS fund** to your **mutual fund portfolio**: BenefitWhy It Matters**Tax Savings**You can claim **tax deduction** of up to **₹1.5 lakh** under **Section 80C**. For someone in the **30% tax bracket**, this can save up to **₹46,800** in taxes every year.**Shortest Lock-in Period****ELSS funds** have a **lock-in period** of just **3 years**. Compare this with **PPF** (15 years), **tax-saving FDs** (5 years), or **NSC** (5 years). **ELSS** offers the **shortest lock-in** among all **tax-saving options**.**Higher Return Potential**Since **ELSS funds** invest primarily in **equities**, they have historically delivered **12-15% annual returns** over the long term. Top-performing funds have delivered **18-21%** returns in 5 years.**Diversification****ELSS funds** invest across different **sectors** and **market caps**, reducing the risk of relying on a single company or industry.**Wealth Creation****ELSS funds** are not just for **tax saving** – they are powerful **wealth creation** tools. For example, the **SBI Long Term Equity Fund**, India's oldest ELSS fund, turned a ₹10,000 monthly **SIP** into nearly **₹15 crore** in 32 years, delivering **17.94% XIRR** returns.**[Flexible Investment Options](https://sanchaykaro.com/launch-of-abakkus-flexi-edge-fund/)**You can [invest](https://sanchaykaro.com/%f0%9f%92%b8-sip-vs-lump-sum-which-is-right-for-you/) through **lump sum** or **SIP**. **SIP** allows you to start with as little as **₹500** per month.**Professional Management**Expert **fund managers** do all the research and stock selection. You don't need to pick individual stocks yourself.**No TDS on Redemption**There is no **TDS** deducted when you redeem your **ELSS units** after the **lock-in period**.--- ### Who Should Invest in Tax Saving Funds? (Ideal Investor Profile) **ELSS funds** are perfect for: - **Taxpayers** under the **old tax regime** who want to claim **deductions** under **Section 80C**. - **Young investors** with a **high risk appetite** and a **long-term horizon** (at least 3-5 years). - **Salaried individuals** who want to save taxes while building **wealth** for the future. - **Investors who want to start with small amounts** – **SIP** starts from as low as **₹500** per [month](https://sanchaykaro.com/%e2%82%b92000-monthly-sip-can-you-reach-%e2%82%b910-lakhs/). - **Investors looking for a short lock-in period** compared to **PPF** (15 years) or **tax-saving FDs** (5 years). - **Investors who believe in the growth story of India** and want to participate in the **stock market**. **Who should AVOID ELSS Funds?** - **Conservative investors** who cannot tolerate **market volatility** (consider **PPF** or **tax-saving FDs** instead). - **Short-term investors** who need their money back within **3 years** (the **lock-in period** does not allow withdrawal). - **Investors who are under the new tax regime** – **Section 80C** deductions are not available under the new regime. - **Investors who need guaranteed returns** – **ELSS funds** are **market-linked** and returns are not guaranteed. --- ### Important: ELSS Tax Benefit is Only Under the Old Tax Regime The **new tax regime** introduced in 2020 and modified in subsequent **Union Budgets** has become the default regime. Under the **new tax regime**, income up to **₹12.75 lakh** is effectively **tax-free** due to the **standard deduction** of ₹75,000. However, the **new regime does not allow most exemptions and deductions**, including **Section 80C**. The **Section 80C** tax benefit for **ELSS funds** is only available if you choose the **old tax regime** while filing your **Income Tax Return (ITR)** . If you are in the **new tax regime**, you **cannot claim** the ₹1.5 lakh deduction on **ELSS investments**. **Which regime should you choose?** If you have significant **tax-saving investments** (ELSS, PPF, life [insurance](https://sanchaykaro.com/your-health-insurance-deserves-a-birthday-too/), etc.) and home loan interest deductions, the **old regime** may be better. If your income is moderate and you do not have many deductions, the **new regime** may be simpler and more beneficial. Consult your **financial advisor** before deciding. --- ### Lock-in Period Rules for ELSS Funds (Important to Understand) The **lock-in period** for **ELSS funds** is **3 years from the date of investment**. This means you cannot redeem or withdraw your **ELSS investment** for at least 3 years after investing. No partial withdrawals are allowed during the **lock-in period**. **For SIP investors:** Each **SIP instalment** has its own **separate lock-in period** of 3 years from its respective investment date. For example: - January 2024 **SIP** → Withdrawable after January 2027 - February 2024 **SIP** → Withdrawable after February 2027 - March 2024 **SIP** → Withdrawable after March 2027 After the **3-year lock-in period**, your **ELSS investment** becomes **fully liquid**. You can redeem 100% of your units without any restrictions or **exit load**. However, many experts recommend [staying invested](https://sanchaykaro.com/staying-invested-the-psychology-and-discipline-of-long-term-wealth-creation/) beyond the **lock-in period** (5-7+ years) to fully benefit from the power of **compounding** and **wealth creation**. [[SIP for Dream Home Buy](https://sanchaykaro.com/sip-for-daughter-marriage/)](https://sanchaykaro.com/sip-for-daughter-marriage/)--- ### Top Tax Saving Funds (ELSS) in India (2026) Here are some of the **best [ELSS](https://sanchaykaro.com/sbi-elss-tax-saver-fund/) funds** in India based on **AUM** and **5-year returns**: Fund NameAUM (₹ Crore)5-Year Return (%)Expense Ratio (Direct)**SBI ELSS Tax Saver Fund**~31,86220.27%~0.30%**HDFC ELSS Tax Saver Fund**~16,74920.13%~0.30%**[Motilal Oswal ELSS Tax Saver Fund](https://sanchaykaro.com/motilal-oswal-consumption-fund-nfo-open-1st-oct-to-15th-oct-2025/)**—19.24%0.65%**DSP ELSS Tax Saver Fund**—18.47%~0.40%**[Parag Parikh ELSS Tax Saver Fund](https://sanchaykaro.com/parag-parikh-elss-tax-saver-fund/)**—17.92%0.62%**Quant ELSS Tax Saver Fund**—33.49% (1-year)—**Note:** The **SBI ELSS Tax Saver Fund** is one of the largest **ELSS funds** in India. The **SBI Long Term Equity Fund**, India's oldest ELSS fund, has a **32-year track record** and has delivered **16.03%** over 15 years, **17.59%** over 10 years, and **24.31%** over 5 years. *Disclaimer: Past performance does not guarantee future returns. Please consult your **financial advisor** before investing.* --- ### Risks of Tax Saving Funds (Must Read Before Investing) **ELSS funds** carry **significant risks** that every **investor** must understand: RiskExplanation**Market Risk****ELSS funds** are **equity-oriented**, so they are subject to **market volatility**. Your **NAV** can go up or down based on **stock market** movements.**Lock-in Risk**You cannot withdraw your money for **3 years**, even in an emergency. You must plan your **liquidity needs** accordingly.**No Guaranteed Returns**Unlike **PPF** or **FDs**, **ELSS funds** do not offer **guaranteed returns**. Your **returns** depend on **market performance**.**Fund Manager Risk**Your **returns** depend on the **fund manager's** skill in picking the right stocks. A bad decision can hurt your **returns**.**Underperformance Risk****ELSS funds** can underperform the broader **market** or other **tax-saving options** in certain market cycles.**How to manage these risks?** - Invest through **SIP** to reduce **timing risk**. - Choose **ELSS funds** with a consistent **track record** over 5-10 years. - **Diversify** your **portfolio** – do not put all your money in **ELSS** alone. - Stay invested for **5-7+ years** to ride out **market volatility**. --- ### ELSS vs PPF vs NPS vs Tax-Saving FD – Which is Better? Many **investors** get confused between **ELSS**, **PPF**, **NPS**, and **tax-saving FDs**. Here is a simple comparison: FeatureELSSPPFNPSTax-Saving FD**Lock-in Period****3 years** (shortest)15 yearsTill retirement (age 60)5 years**Return Potential**High (12-15% historically)Moderate (7.1% currently)Moderate (8-10%)Low (6-7%)**Risk Level**High (market-linked)Very Low (government-backed)ModerateVery Low**Tax on Returns****LTCG** 12.5% above ₹1.25 lakh**Tax-free** (EEE status)Partial tax on withdrawalTaxed at **slab rate****Best For**Young investors with **high risk appetite**Conservative investors seeking **safety****[Retirement planning](https://sanchaykaro.com/retirement-planning-calculator/)**Ultra-conservative investors**Which is best for you?** - If you are **young** and want **higher returns** with a **short lock-in**, choose **ELSS**. - If you want **safety** and **tax-free returns**, choose **PPF**. - If you are planning for **retirement**, choose **NPS**. - If you want **guaranteed returns** with **low risk**, choose **tax-saving FD**. --- ### ELSS vs Regular Mutual Fund – What's the Difference? AspectELSS FundRegular Mutual Fund**Tax Deduction**Yes – up to ₹1.5 lakh under **Section 80C**No**Lock-in Period****3 years** (mandatory)No lock-in (except for certain funds)**Investment Objective****Tax saving** + **wealth creation**Primarily **wealth creation****Redemption Rules**Cannot redeem for 3 yearsCan redeem anytime (subject to **exit load**)**Suitability**Taxpayers under **old regime**All **investors****Key takeaway:** If you are a **taxpayer** under the **old regime**, **ELSS** is a great way to save taxes while also building **wealth**. If you do not need **tax deduction**, you may consider regular **mutual funds** with **no lock-in**. --- ### Taxation on Tax Saving Funds (ELSS) – Simple Rules **ELSS funds** are treated as **equity-oriented funds** for **taxation** purposes. This is the same as **large cap funds**, **mid cap funds**, **flexi cap funds**, and **multi cap funds**. **At the time of investment:** - You can claim **tax deduction** of up to **₹1.5 lakh** per financial year under **Section 80C** (only under the **old tax regime**). **At the time of redemption (after 3 years):** TypeHolding PeriodTax Rate**Short Term Capital Gains (STCG)**Less than 12 months**20%** (flat)**Long Term Capital Gains (LTCG)**12 months or more**12.5%** on gains above **₹1.25 lakh** per year**Key tax rules for FY 2026-27:** - Gains up to **₹1.25 lakh** in a **financial year** are **tax-free** (under **Section 112A**) - Any **LTCG** above ₹1.25 lakh is taxed at **12.5%** (without **indexation** benefit) - **STCG** is taxed at a flat **20%** regardless of your **income tax slab** - **Securities Transaction Tax (STT)** of **0.001%** is applicable - Dividends (IDCW) are added to your **income** and taxed as per your **slab rate** **Important:** Since **ELSS funds** have a **mandatory lock-in period of 3 years**, you will always fall under the **LTCG category** (because you cannot redeem before 12 months). This means your **gains** will be taxed at **12.5%** only if they exceed **₹1.25 lakh** in a financial year. **Example:** If you invest ₹1.5 lakh in an **ELSS fund** and after 3 years your investment grows to ₹2 lakh (gain of ₹50,000), you will pay **zero tax** because the gain is below **₹1.25 lakh**. --- ### How to Invest in Tax Saving Funds Using Sanchaay Karo App Now that you understand what a **Tax Saving Fund (ELSS)** is, the next step is **investing**. The easiest way is through the **Sanchaay Karo app**. **Sanchaay Karo** is a simple, trusted, and **SEBI-registered** mutual fund investment platform. It helps you invest in **top ELSS funds** and hundreds of other funds with just a few taps. #### Why Choose Sanchaay Karo App for ELSS Fund Investment? - **Smart Goal-Based Investing**: Tell the app your goal (retirement, child's education, buying a house). It suggests the right **ELSS fund** based on your **risk profile** and **investment horizon**. - **Simple Dashboard**: See all your investments in one place – no confusion or clutter. Track **NAV**, **returns**, and **portfolio** in real time. - **Quick KYC**: Complete your **KYC online** using Aadhaar and PAN in just 5 minutes. **Paperless KYC** is fully supported. - **Start SIP from ₹500**: You don't need a lot of money. Start small with a **Systematic Investment Plan (SIP)** . You can do **monthly SIP**, **weekly SIP**, or **daily SIP**. - **Track Performance**: Get regular updates on how your **ELSS fund** is performing against its **benchmark** (like Nifty 500 TRI). - **No Hidden Charges**: Transparent and low-cost. You can choose between **regular plan** and **direct plan** options. **Direct plans** have lower **expense ratios**. - **Stay On Track**: Get timely reminders so your **SIPs** never stop. - **Access to All AMCs**: Invest in **SBI ELSS Tax Saver Fund**, **HDFC ELSS Tax Saver Fund**, **[Motilal Oswal ELSS Tax Saver Fund](https://sanchaykaro.com/motilal-oswal-consumption-fund-nfo-open-1st-oct-to-15th-oct-2025/)**, **DSP ELSS Tax Saver Fund**, **[Parag Parikh ELSS Tax Saver Fund](https://sanchaykaro.com/parag-parikh-elss-tax-saver-fund/)**, and many more. #### Steps to Invest in Tax Saving Funds (Very Easy) 1. **Download** the **Sanchaay Karo app** from Google Play Store or Apple App Store. 2. **Sign up** using your mobile number and email. 3. **Complete KYC** – upload **PAN card** and Aadhaar (fully paperless). You can also do **video KYC** if needed. 4. **Search** for "ELSS" or "Tax Saving Fund" or let the app recommend one based on your **financial goals**. 5. **Compare** different **ELSS funds** based on **returns**, **expense ratio**, **exit load**, and **fund manager** track record. 6. **Choose** between **lumpsum** (one-time) or **monthly SIP** investment. For **ELSS**, **SIP** is recommended to reduce **timing risk**. 7. **Pay** using **UPI**, net banking, or debit card. 8. **Done!** Your investment starts growing. You will receive regular statements. 👉 **\[Click Here to Download Sanchaay Karo App Now\]** () --- ### Important Tips Before Investing in Tax Saving Funds (ELSS) Before you invest in an **ELSS fund**, keep these points in mind: 1. **Check Your Tax Regime**: **Section 80C** deduction is only available under the **old tax regime**. If you are in the **new tax regime**, you cannot claim the tax benefit. 2. **Start Early in the Financial Year**: Many investors rush to invest in **ELSS funds** near the end of the **financial year** (March) to save taxes. This leads to **lump sum** investments, which can be risky if the **market** is at a high point. Instead, start an **SIP** at the beginning of the **financial year** (April) to spread your investments over time. 3. **Don't Invest Only for Tax Saving**: **ELSS funds** are powerful **wealth creation** tools. Look beyond the **tax deduction** and focus on **long-term growth**. Even if you do not need the tax benefit, **ELSS funds** can be excellent **equity investments** due to their disciplined **lock-in period**. 4. **Check the Fund's Track Record**: Look for **ELSS funds** with consistent performance over **5-10 years**. Avoid funds that have performed well only in the last 1-2 years. 5. **Compare Expense Ratios**: **Direct plans** have much lower **expense ratios** (often 0.30-0.65%) than **regular plans** (often 1.00-1.50%). Over time, this difference matters. 6. **Stay Invested Beyond Lock-in**: The **lock-in period** is **3 years**, but **ELSS funds** are designed for **long-term wealth creation**. Stay invested for **5-7+ years** to fully benefit from the power of **compounding**. 7. **Do Not Redeem Immediately After Lock-in**: Many investors redeem their **ELSS units** as soon as the **lock-in period** ends. This may not be wise if the **market** is down. Consider your **financial goals** and **market conditions** before redeeming. 8. **Diversify Your Portfolio**: Do not put all your money in **ELSS funds**. Combine them with other **tax-saving options** like **PPF** or **NPS** for a balanced **portfolio**. 9. **Check Exit Load**: Most **ELSS funds** have **nil exit load** after the **lock-in period**. However, always check the **Scheme Information Document (SID)** before investing. --- ### Frequently Asked Questions (FAQs) About Tax Saving Funds (ELSS) **Q1: What is a Tax Saving Fund?** A: A **Tax Saving Fund** is an **Equity Linked Savings Scheme (ELSS)** – a type of **equity mutual fund** that offers **tax deduction** under **Section 80C** up to ₹1.5 lakh per year. **Q2: Are ELSS funds safe?** A: **ELSS funds** are **equity-oriented**, so they carry **market risk**. They are not as safe as **PPF** or **FDs**, but they offer **higher return potential**. Your **principal** is not guaranteed. **Q3: What is the lock-in period for ELSS funds?** A: **ELSS funds** have a mandatory **lock-in period** of **3 years**. You cannot withdraw your money before 3 years. **Q4: What is the minimum SIP amount for ELSS funds?** A: Most **ELSS funds** allow **SIP** starting from **₹500** per month. Through the **Sanchaay Karo app**, you can start with as little as **₹500**. **Q5: How much returns can I expect from ELSS funds?** A: Historically, **ELSS funds** have delivered **12-15% annual returns** over the long term. Top-performing funds have delivered **18-21%** returns in 5 years. **Q6: Is ELSS tax benefit available under the new tax regime?** A: **No.** The **Section 80C** tax deduction for **ELSS funds** is only available under the **old tax regime**. Under the **new tax regime**, you cannot claim this deduction. **Q7: How are ELSS funds taxed on withdrawal?** A: Since **ELSS funds** have a **3-year lock-in**, any redemption after 3 years qualifies as **LTCG**. Gains up to ₹1.25 lakh per year are **tax-free**. Gains above ₹1.25 lakh are taxed at **12.5%**. **Q8: Can NRIs invest in ELSS funds?** A: Yes, **NRIs** can invest in **ELSS funds** through **Sanchaay Karo app** using their NRE/NRO account. **Q9: What is the difference between ELSS and PPF?** A: **ELSS** has a **3-year lock-in** and offers **higher returns** (12-15%) but carries **market risk**. **PPF** has a **15-year lock-in** and offers **lower returns** (7.1%) but is **government-backed** and **tax-free**. **Q10: Should I invest in ELSS if I am not looking for tax saving?** A: **Yes.** **ELSS funds** are excellent **wealth creation** tools even without the tax benefit. The mandatory **lock-in period** encourages disciplined investing and protects you from short-term **market volatility**. --- ### Final Words – Should You Invest in a Tax Saving Fund (ELSS)? **Yes**, if you: - Are a **taxpayer** under the **old tax regime** and want to claim **deductions** under **Section 80C**. - Have a **high risk appetite** and can handle **market volatility**. - Have a **long-term horizon** (at least 3-5 years). - Want **higher returns** than **PPF**, **FDs**, or **NSC**. - Are a **young investor** looking to build **wealth** while saving taxes. - Can stay invested beyond the **lock-in period** for better **compounding**. **No**, if you: - Are under the **new tax regime** (you cannot claim the tax benefit). - Have a **low risk tolerance** and cannot handle **market fluctuations**. - Need your money back within **3 years**. - Are looking for **guaranteed returns** – consider **PPF** or **FDs** instead. - Are a **retiree** needing **capital protection** – **PPF** may be more suitable. **Tax Saving Funds (ELSS)** are among the most powerful tools for **wealth creation** in India. They offer the unique **dual benefit** of **tax savings** under **Section 80C** and **equity market returns**. With the **shortest lock-in period** (3 years) among all **tax-saving options**, they are ideal for **young investors** and **salaried individuals** who want to build **long-term wealth** while reducing their **tax liability**. The golden rule for **ELSS investing**: **Start early in the financial year, invest through SIP to reduce timing risk, stay invested beyond the 3-year lock-in for better compounding, and always choose direct plans for lower expense ratios.** Start your **investment journey** today with the **Sanchaay Karo app**. 👉 **\[Click Here to Download Sanchaay Karo App Now\]** () --- **Disclaimer:** This blog is for **educational purposes** only. **Mutual fund investments** are subject to **market risks**. **Tax Saving Funds (ELSS)** carry **equity market risk** and are not guaranteed. Please read all **scheme related documents** carefully, including the **Scheme Information Document (SID)** and **Statement of Additional Information (SAI)** , and consult your **financial advisor** before investing. **Past performance** does not guarantee **future returns**. The **Sanchaay Karo app** is a platform for mutual fund investments; all investments are subject to **market risk**. The **tax benefits** mentioned are available only under the **old tax regime** as per current laws. Tax laws are subject to change. Please consult your **tax advisor** before making any investment decision.