ELSS funds: the tax deduction, the lock-in and the tax on gains
ELSS is the one kind of mutual fund that can lower your taxable income. The deduction works only under the old tax regime.
Updated 23 Oct 2026 · 2 min read
An equity-linked savings scheme (ELSS) is an equity fund that keeps at least 80% in shares and locks each investment for three years. In return, money put into it can count towards a tax deduction.
The deduction
Under the old tax regime, the amount you invest in ELSS during a financial year can be deducted from your taxable income, up to ₹1.5 lakh a year. That limit is shared with the other items in the same deduction, commonly known as 80C: EPF contributions, PPF, life insurance premiums, the principal part of home loan repayments, children's tuition fees and others. If those already add up to ₹1.5 lakh, an ELSS purchase adds nothing to the deduction.
The new tax regime applies unless you choose the old one, and it has no such deduction. Under the new regime, an ELSS is taxed like any other equity fund and gives no tax benefit when you buy it.
The three-year lock-in
Each purchase is locked for three years from its own date. With a SIP, every instalment has its own lock-in: units bought on 5 January 2026 can be redeemed from 5 January 2029, and units bought on 5 February 2026 from 5 February 2029. Locked units cannot be redeemed, switched or transferred.
When the three years are up, nothing happens on its own. The units stay invested until you redeem them.
How the gains are taxed
ELSS is an equity-oriented fund, so the equity rates apply when you redeem. By the time a unit can be sold it has been held for three years, so every gain is long-term:
- Tax-free up to ₹1.25 lakh in a financial year, a limit shared with your other long-term gains on equity funds and listed shares
- 12.5% on long-term gains above that, plus 4% cess
How mutual fund gains are taxed covers the full rules.
Proof for the deduction
Your account statement shows the date and amount of each purchase. Salaried people under the old regime declare ELSS investments to their employer, who takes them into account when deducting tax from salary. The deduction is then claimed in the income tax return for the year of purchase.
Questions
Can I claim the ELSS deduction under the new tax regime?
No. The new regime has no deduction for ELSS or for the other items in the ₹1.5 lakh limit.
When can I redeem ELSS units bought through a SIP?
Each instalment can be redeemed three years after its own purchase date, so the units become available one month at a time.
Is the ₹1.5 lakh limit only for ELSS?
No. It is shared with EPF, PPF, life insurance premiums and the other items in the same deduction.
Are ELSS gains tax-free?
Long-term equity gains up to ₹1.25 lakh in a financial year are tax-free, counted together with other equity funds and listed shares. Gains above that are taxed at 12.5%.
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This guide explains how things work. It is not investment, tax or legal advice. Rules change; check the fund house's documents, and a qualified adviser for your own case.