Equity Linked Savings Schemes (ELSS), once among the most popular investment options for saving tax, are no longer the top choice for investors. Investments in ELSS funds have been steadily declining due to the growing influence of the new tax regime. Experts believe that the new tax system has directly impacted the demand for these tax-saving mutual funds.

The key features of ELSS have traditionally been a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act and a short lock-in period of just three years. However, its appeal has diminished because the Section 80C deduction is not available under the new tax regime.

**Investors shifting towards other funds**
Over the past few years, the government has made the new tax regime more attractive. A large number of taxpayers are opting for this system due to lower tax rates and a simplified tax structure. The impact of this shift is clearly visible on ELSS funds. Data from the mutual fund industry shows consistent outflows from ELSS schemes in recent years. Conversely, investments in other equity schemes—such as flexi-cap, multi-cap, index funds, and ETFs—have risen. Experts note that investors are not exiting the equity market; rather, they are choosing more flexible investment options over tax-saving funds.

**Lock-in period is also a factor**
ELSS funds come with a three-year lock-in period, whereas most other equity mutual funds do not have such a restriction. Investors can redeem their investments whenever the need arises. Consequently, investors adopting the new tax regime are prioritizing funds that offer greater freedom regarding both investment and withdrawal.

**Will ELSS lose its relevance?**
Financial experts believe that the relevance of ELSS has not vanished entirely. For taxpayers who still opt for the old tax regime, it remains an effective vehicle for saving tax while investing in the equity market. However, the future success of ELSS funds will depend less on tax benefits and more on their performance and the returns delivered to investors. With the expansion of the new tax regime, funds in this category will need to demonstrate superior performance to attract investors.

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