LTCG on ELSS: Is ELSS Still a Good Tax-Saving Option?
- Rashmita Choudhary
- Jul 14, 2025
- 7 min read
Updated: Aug 13, 2025
The new LTCG tax does not negate the benefits of equity-linked savings schemes (ELSS) over alternative investment options. Despite the increased LTCG tax, ELSS funds are still preferable, and this article will explain how they have benefited your long-term savings. When you invest in equity-linked savings plans, your money will increase at least twice as quickly as the SIP rate. Your savings are rising faster than inflation because they reside in bonds and stocks. It is because bond prices fall as inflation increases, but equity units rise. But since LTCG is now applicable to ELSS, things have changed. The LTCG tax must now be taken into consideration by ELSS investors before assets are redeemed. In this article, we will discuss the impact of LTCG on ELSS investment and explain whether it is still worthwhile.
Table of Contents
Long-Term Capital Gains (LTCG) Tax on ELSS
The tax paid on the profit made from investing in assets like real estate, stocks, or equity-dominated products (like mutual funds) that are held for a specific period of time is known as LTCG. Each instrument has a different long-term horizon. Finance Minister Arun Jaitley reinstated the LTCG tax on stocks and equity-oriented mutual funds in the 2018–19 government budget. The LTCG was exempt from taxes until 2018 after being abolished by Mr. P Chidambaram, the finance minister at the time, in 2004–05. Long-term capital gains on equity-oriented funds that exceed Rs 1.25 lakh annually are subject to 12.5% taxation without the benefit of indexation. You don't have to be concerned that paying taxes will take up a significant portion of your future gains. In the long term, ELSS remains one of the strongest wealth accumulators, even with the tax burden on LTCG.
ELSS Tax Implications
The only investment option that brings together the benefits of wealth accumulation and tax reduction is the Equity Linked Savings Scheme (ELSS). Only a small percentage of its investments are in debt; the majority are in stocks or equity-oriented products. The ability of investors to deduct up to Rs 1.5 lakh under Section 80C of the Income Tax Act is a special tax benefit provided by ELSS. As a result, they can save up to Rs 46,800 in taxes. This has a three-year lock-in period, indicating that investors cannot withdraw their amounts before that time. Hence, ELSS fund gains are considered Long Term Capital Gains (LTCG). The LTCG exemption level has been raised from Rs 1 lakh to Rs 1.25 lakh following the most recent declaration in Budget 2024. Additionally, the LTCG tax rate increased from 10% to 12.5%.
ELSS Continues to Be the Best Option for Retail Investors
Individual investors (retail investors) can save taxes by investing in ELSS, which has the potential to quadruple returns over time while outpacing inflation. ELSS, a tax-saving mutual fund, is eligible for a Section 80C tax deduction of up to Rs 1.5 lakh annually under the Income Tax Act of 1961. It has the lowest lock-in term of any other Section 80C investment option, at only three years. The systematic investment plan, or SIP, is one option for investing in ELSS. It makes it easier to make fixed-amount, recurrent investments in the ELSS. The ELSS allows you to invest an amount as small as Rs 500 per instalment through the SIP.
High Flexibility of ELSS
For investors wishing more financial flexibility, ELSS is a better option than ULIPs. If you are not satisfied with the present fund, you can switch to a different one or modify your plan under ELSS. When investing in ULIPs, this is not the case. Only within the same unit-linked insurance plan may you switch between funds. For example, under the same plan, you can switch from an equity fund to a debt fund or vice versa. Moreover, ULIP has a five-year lock-in term, compared to the three-year term of ELSS.
ELSS or Unit Linked Insurance Plan (ULIP): Should You Switch?
A unit-linked insurance plan (ULIP) combines the advantages of investment and life insurance. It gets locked in for five years. It is best to have a pure life insurance policy, such as a term life insurance plan, because ULIPs provide low mortality benefits. Additionally, the initial years of ULIPs have higher fees, which get subtracted from the premium paid for the plan. Combining insurance and investments is not a good idea. As long as it suits your risk tolerance, investing in ELSS can help you save taxes and earn profits that outpace inflation. A term life insurance plan that offers greater mortality coverage for your life insurance needs might be something to contemplate.
Choose Better Performing Option with Taxable Returns
Since life insurance plans offer tax-free returns, you may have observed that many insurance companies promoted them as a good alternative to equity-oriented funds following the LTCG tax announcement. You must, however, opt for assets that suit your risk tolerance if you want to achieve your financial goals. It is important to avoid combining investments with insurance. Despite the long-term capital gains tax, ELSS offers tax savings and returns that beat inflation for aggressive investors. For mortality coverage, not for returns, you need to enroll in a life insurance plan. Furthermore, even if life insurance plans like ULIP are tax-free, their returns can be less than those of ELSS.
Higher Holding Period and LTCG on ELSS
ELSS investments can help you achieve your long-term financial objectives. So, you can keep making them even after the three-year lock-in period. In addition to the potential for tax savings, ELSS may eventually yield double-digit returns. Because it can save you up to Rs 46,800 a year, ELSS is a fantastic option to reduce your taxes if you fall into one of the higher-income tax brackets. Additionally, one of the few equity-oriented investments that offers Section 80C tax benefits up to Rs 1.5 lakh annually is ELSS, which primarily invests in stocks. Because ELSS is a savvy tax-saving investment, you might want to consider making a long-term investment. One of the key features of a strong tax-saving strategy is that ELSS is a solid investment first and a tax-saver subsequently. Because of this, it helps. After all, even with the 12.5% LTCG tax on gains over Rs 1.25 lakh annually, it is an ideal investment.
Conclusion
Many investors felt anxious about how their profits might be impacted by the long-term capital gains (LTCG) tax. ELSS has greater advantages than several other investment techniques, even when long-term capital gains are involved. However, if you invest in ELSS funds before the end of this financial year, you will still be exempt from taxes. You can follow this guide to make a wise decision or consult experts if you still have questions or doubts.
Frequently Asked Questions
Under which section does ELSS come?
According to Section 80C of the Income Tax Act of 1961, an equity-linked savings system, or ELSS, is an investment that can save taxes.
Is ELSS taxable after 3 years?
No, after the three-year lock-in period, investments made through the Equity Linked Saving Scheme (ELSS) are not taxable; nevertheless, any gains beyond Rs 1.25 lakh in a fiscal year are subject to Long-Term Capital Gains (LTCG) tax.
What is a tax on the SIP maturity amount?
SIP returns are not completely tax-free; depending on the mutual fund category and the holding period, they might prove liable to capital gains tax.
What is tax on ELSS returns?
The three-year lock-in period of ELSS funds means that you can only realize long-term capital gains. These gains are tax-exempt, up to Rs 1,25,000 annually. Beyond this threshold, any gains are subject to 12.5% taxation and do not benefit from indexation.
What is the tax on ELSS mutual funds?
Mutual funds that are part of the Equity Linked Savings Scheme (ELSS) are subject to equity fund taxes. Accordingly, long-term capital gains (LTCG) that surpass Rs 1.25 lakh during a fiscal year are subject to 10% taxation without the advantage of indexation. If you get dividends, they are added to your income and subject to taxation based on your income tax slab.
Are ELSS returns tax-free?
Although they provide tax advantages, ELSS (Equity Linked Savings Scheme) returns are not completely tax-free. Although Section 80C allows for tax deductions on investments up to Rs 1.5 lakh in ELSS, profits (long-term capital gains) are subject to taxes above a specific threshold.
Is LTCG from ELSS taxable?
Up to Rs 1.25 lakh in capital gains from ELSS are exempt from LTCG tax. A 12.5% LTCG tax, however, is due on Rs 25,000 (between Rs 1,50,000 and Rs 1,25,000). The LTCG tax on your ELSS capital gains will amount to Rs 3,125 (12.5% of Rs 25,000).
Should I opt out of ELSS because of the LTCG tax?
Long-term capital gains on stocks or equity-dominated funds will be subject to taxation if the profits surpass Rs 1 lakh following the reinstatement of the LTCG tax in the Union Budget 2018. Investors are uneasy about the change, and many are unsure if the product is a good fit for their needs. Regarding tax savings, you can still receive up to Rs 1.5 lakh in tax benefits under section 80C through ELSS programs. Income tax and LTCG are two different things. As a result, your income tax slab and LTCG tax rate will not change simultaneously. As an investor, you should keep making ELSS investments without panicking. However, we strongly advise that ELSS, which has the lowest lock-in period and is among the finest investment options under section 80C, continue to be one of the best options even after 10% LTCG was implemented.
What does ELSS mean for me?
If your risk tolerance is compatible with ELSS investments, you can keep making them to achieve your investing goals. With its dual advantages of tax savings and returns that outpace inflation, it proves to be one of the highest investments. Additionally, among all the investments that qualify for Section 80C tax savings, it has the shortest lock-in time. Using the SIP, which allows you to contribute as little as Rs 500 per instalment, to invest in ELSS is beneficial.
Can I combine ELSS and PPF?
Under Section 80C, you can reduce your taxes by investing in PPF and ELSS. Since PPF gives one of the highest rates among fixed-income investments and ELSS has the potential to generate double-digit gains over time, the combination is advantageous. By doing this, you have three benefits.
The portfolio contains a well-balanced mix of debt and equity.
The equity offering propels the portfolio's growth potential.
PFF gives you the security of a government-backed investment alternative.
How much should I invest in ELSS to save tax?
Accordingly, when filing an Income Tax Return (ITR), only investments up to Rs 1.5 lakh may be claimed as a tax deduction. For instance, you must invest Rs 2 lakh in an ELSS fund during a financial year to qualify for a Rs 1.5 lakh tax benefit.
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