Is ELSS still a good investment without deduction offered under the New Tax Regime?

In 2023, new tax regime became a default regime which means the taxpayers must opt out of the new tax regime to be able to claim tax exemptions given under sections 80C, 80D and 80G, among others.

The provision under section 80C enables taxpayers to claim deduction for investing in various financial instruments such as small savings schemes, public provident fund (PPF), life insurance premiums, and others.

These tax instruments also include equity linked savings scheme (ELSS) for which taxpayers are typically given income tax deduction of upto ₹1.5 lakh.

With no such exemption offered in the new tax regime, should investors stop their investment in equity linked saving scheme?

What is an ELSS scheme?

ELSS mutual funds invest at least 80 per cent in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance. These schemes have a lock-in period of three years (shortest amongst all other tax saving options).

Total number of equity linked savings schemes are 43 with total assets under management (AUM) amounting to ₹2.32 lakh crore, reveals the latest AMFI (Association of Mutual Funds in India) data as on Jan 31, 2025. 

These are some of the reasons for which it still makes sense to invest in equity linked savings schemes (ELSS):

Reasons to invest in ELSS

I. Growth opportunity: These are equity schemes and they offer growth opportunity in long term.

II. Three-year lock in: Since equity gives handsome return in the long term, a three-year lock in period works to the advantage of investors.

III. Good returns: These schemes tend to offer good returns. In the past three years, ELSS – as category – has given 14.56 per cent return, shows the Morning Star data. The top performer’s return stood at 24.04 percent whereas the bottom performer delivered 8.07 percent in the past three years.

IV. Lumpsum or SIP: Since you are opting to invest in equity via mutual funds, you can choose the option of lumpsum or SIPs (systematic investment plans) based on what suits you more. When you choose an SIP, you can get exposure to equity by investing in small tranches such as ₹500 per month. 

This also helps you buy at different price points, thus enabling you to capitalise on the advantages of rupee cost averaging.  

V. Can opt for old tax regime: Additionally, if you still want to claim tax exemption for ELSS, you can opt out of the new tax regime and choose the old one. In the old tax regime, you can still claim exemption under section 80C which covers ELSS.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.