ELSS Under New Tax Regime in India:The introduction of a higher tax-free income threshold under India’s new tax regime has sparked an important question for investors: does investing in Equity Linked Savings Schemes (ELSS) still make sense when income up to ₹12.75 lakh attracts zero tax? Financial planners say the answer depends less on tax savings now and more on long-term investment goals.
Why ₹12.75 Lakh Income Can Be Tax-Free?
Under changes announced in the Union Budget 2025, resident individuals opting for the new tax regime can pay zero income tax on salary income up to ₹12 lakh, thanks to an enhanced rebate under Section 87A. When combined with the standard deduction of ₹75,000, salaried taxpayers effectively pay no tax on income up to ₹12.75 lakh.
Faranaaz Karbhari, Counsel at HSA Advocates said: “As a result of this decision, assessees will be permitted to claim a rebate under Section 87A of the Income-tax Act, 1961 for AY 2024-25 when filing online returns against tax computed under various sections of Chapter XII of the Act. However, the Bombay High Court did not decide on the validity of such claims. Consequently, any claims raised may be subject to examination under Section 143(1) of the Act and/or assessment by the Assessing Officer.”
ELSS Under New Tax Regime in India
ELSS funds function as diverse equity mutual funds which investors historically preferred because these funds provide three tax benefits which include:
- Tax deduction up to ₹1.5 lakh under Section 80C (old tax regime)
- Potentially higher returns compared with traditional tax-saving instruments
- The shortest lock-in period among tax-saving options three years
ELSS serves two purposes because financial reports indicate it helps people save taxes while also allowing them to build wealth through equity investments.
“Returns typically range from 10 to 15 per cent compounded annually,” says Mohit Gang, co-founder and chief executive officer, Moneyfront. The lock-in also encourages discipline. “Staying invested in volatile times, due to the lock-in, benefits investors over the long run,” says Abhishek Tiwari, executive director and chief business officer, PGIM India Mutual Fund.
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Does ELSS Lose Relevance in the New Tax Regime?
The new tax system became the standard choice because it provides reduced tax rates which eliminate all deduction possibilities thus making ELSS tax benefits unavailable to most employed workers. If your income is already within the ₹12.75 lakh zero-tax bracket, investing in ELSS purely to save tax may not provide additional benefits.
The Finance Minister said in Budget 2025 speech: “I am now happy to announce that there will be no Income Tax Payable up to income of 12 lakh rupees. I propose to revise tax rate structures as follows, zero to four lakh rupees nil, 4.8 lakh rupees to five four to eight lakh rupees, 5% eight to 12 lakh rupees, 10% 12 to 16 lakh rupees, 15% 16 to 20 lakh rupees, 20% 20 to 24 lakh rupees, 25% and above 24 lakh rupees, 30 lakh, 30% to taxpayers, to taxpayers up to 12 lakh of normal income, other than special grade incomes, such as capital gains.”
Experts state that people should evaluate ELSS based on its advantages beyond tax savings. Market-linked returns and disciplined investing remain key advantages. Investors who prefer to take high risks because they want to build their wealth should use ELSS for their investment needs when their investment period lasts between 5 and 7 years or longer.
When ELSS Still Makes Sense?
The new regime still allows you to consider ELSS as an investment option if:
- You want to invest in equities while maintaining a required lock-in period.
- Your primary goal is to build long-term wealth.
- You will reach the rebate threshold after your income increases in future years.
- You prefer to invest in equity funds through SIP because it provides better tax benefits than making frequent trades.
Tax planners recommend that taxpayers should start their planning methods after they reach the income limit, which permits investment deduction options.
When You May Skip ELSS?
ELSS may not be necessary if:
- Your income is comfortably below ₹12.75 lakh
- You prefer liquidity without lock-in
- You already invest in other diversified equity mutual funds
ELSS Under New Tax Regime in India: Experts Analysis
“Assess your Employees’ Provident Fund (EPF) contributions, insurance premiums, and other deductions. Invest in ELSS only if you fall short of the Rs 1.5 lakh limit under Section 80C,” says Rajani Tandale, senior vice-president of mutual funds, 1 Finance.
“A portfolio of stocks diversified across sectors and market caps mitigates the risk associated with individual stocks,” says Raghvendra Nath, managing director, Ladderup Wealth Management.
“The exposure to equities can lead to significant fluctuations in the value of investments in the short term. Investors may even experience negative returns during market downturns,” says Nath.
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The degree of volatility varies by fund composition. “Some funds have higher exposure to midcap and smallcap stocks, which can be highly volatile,” says Tandale. SIP investors cannot withdraw their entire investment after three years. “Each SIP instalment is separately locked for three years, a detail many investors overlook,” says Tandale.
“Those with moderate to high risk tolerance may find ELSS appealing,” says Nath.
ELSS will no longer be attractive for those planning to switch to the new tax regime. “Other equity mutual funds, where they would enjoy greater flexibility, will be more attractive,” says Gang.
Highly risk-averse investors in the old tax regime may also steer clear of ELSS.
Investors can select standard equity funds because it allows them to invest without three-year restrictions.
