Is ELSS Still Worth It in 2025?

As a Mutual Fund Distributor in Pune, we often hear concerns from investors who are becoming unsure about ELSS. Over the years, Equity Linked Savings Schemes (ELSS) have become a go-to option for tax-saving. But, in recent times, there's been a noticeable shift.

According to a report by The Times of India, ELSS funds saw a surprising ?1,600 crore outflow in Q1 of FY26. Sounds like investors are moving away from it, right?

We, Golden Mean Finserv, will dive deeper into the reasons to understand why that is happening...

Key Reasons Behind This Decline

1. The Rise of the New Tax Regime (No Section 80C Benefits)

The main reason behind this trend is the new tax regime, where traditional deductions like those under Section 80C are not available. So, investors who've switched to the new regime naturally don't see ELSS as a tax-saving benefit anymore.

The new regime is now the default option for most taxpayers. Here's why it matters:

• Under the new regime, popular tax-saving options like ELSS, PPF, NSC, and life insurance premiums do not offer any deductions.
• Taxpayers must manually opt into the old regime if they want to continue availing these deductions.

So, if you're no longer getting the ?1.5 lakh deduction under Section 80C, the core reason for investing in ELSS simply vanishes.

New Tax Regime is Generally More Beneficial

One of the biggest attractions of the new regime is that it simplifies tax filing and broadens the income tax slab rates.

Lower to Middle-Income Earners (up to ?12-13 lakh):

Due to the enhanced rebate under Section 87A and the increased standard deduction, individuals with taxable income up to ?12 lakh (or ?12.75 lakh for salaried individuals) can achieve zero tax liability. This makes the new regime highly attractive.

Salaried individuals with minimal deductions find it easier to stick to the new regime.

Without tax-saving incentives, ELSS investments now need to justify their existence purely based on performance.

Increased Awareness of Better Investment Alternatives

Investors now understand they have choices beyond ELSS

• Index funds (lower expense ratios, no lock-in).
• Large-cap or Flexi-cap funds with proven track records.
• Hybrid funds offer a balanced mix of equity and debt.

Without the exclusive tax benefit, ELSS is now just another equity fund with a 3-year lock-in, and that reduces its appeal.

Who Should Continue Investing in ELSS?

As an AMFI registered Mutual Fund Distributor in Pune, we've seen many investors keeping their money in ELSS & staying invested for 5-7 years or more. Even though ELSS has lost some ground, it's not completely irrelevant. Here's who may still find value in it:

Taxpayers Opting for the Old Regime

If you want to stick with the old regime, then ELSS continues to offer you tax benefits under Section 80C. You can claim deductions and still benefit from potential long-term equity growth.

Investors with Long-Term Financial Goals

Even without tax benefits, ELSS can be a disciplined way to build a corpus, especially if:

• You've already been investing via SIPs.
• The fund has performed well over benchmark indices.
• Your investment horizon is 5+ years.

First-Time Equity Investors

The 3-year lock-in period is only available in the ELSS, when it comes to mutual funds. It helps new investors stay invested during market volatility, building discipline.

But What About Taxation on Returns in ELSS Fund Right Now?

When you redeem your ELSS units after the 3-year lock-in, the gains are subject to capital gains tax. After 2025-26

Here's how it works:

• Gains up to ?1.5 lakh in a financial year are tax-free. (Only under the old tax regime)
• Gains above ?1.25 Lakhs are taxed at 12.5% (Long Term Capital Gains tax).

So, while there is a tax on the returns, the structure is still fairly friendly for long-term investors.

Who Should Avoid or Exit ELSS?

Taxpayers Under the New Regime

If you've moved to the new tax regime and your primary reason for choosing ELSS was tax savings, then it no longer serves that purpose. Without the 80C benefit:

• ELSS becomes just another equity fund, with an added lock-in.
• You might find more flexible and better-performing alternatives.

Investors Who Prioritize Liquidity

Since ELSS comes with a 3-year lock-in, it's not ideal for those who:

• May need funds in the short term.
• Want complete control over exit timings.

Underperforming Funds in Your Portfolio

If you have an ELSS fund that has consistently underperformed over 3-5 years, and you no longer get tax benefits, consider redeeming it and switching to a better equity fund.

How to Do Smart Tax Planning in 2025-26?

Tax-saving is important, but it shouldn't be a last-minute process. Instead, here's how you can plan your taxes smartly under the new environment.

Start at the Beginning of the Financial Year

• Use a tax calculator to estimate your liability under both regimes.
• Check which regime suits you better.
• Plan your investments accordingly (with or without 80C).

Conclusion:

So, while ELSS might not be the absolute king of tax-saving it once was, it's not completely out of the game. For people who are sticking with the old tax rules, or those who simply love a disciplined way to invest for the long term through equity SIPs, ELSS still makes a lot of sense. But for most of us, the big takeaway is this that tax rules keep changing, it's time to take a fresh look at your investment plans. Keep yourself updated and aware always!