Are Mutual Funds Under 80C?

•6 min read•by Angel One

Investments in mutual funds can qualify for deduction u/s 80C, allowing you to reduce your taxable income while building long-term wealth. Only specific mutual fund categories qualify for this benefit.

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Mutual funds pool money from investors and invest across assets such as equities and debt. But to leverage the mutual fund deduction under 80C of the Income Tax Act, you need to invest in specific funds known as Equity Linked Savings Schemes (ELSS).

These funds provide a mix of diversification and tax relief. While returns depend on market performance, the tax advantage makes them relevant for long-term planning, especially when aligned with financial goals and investment timelines.

Key Takeaways

Only ELSS funds qualify for tax savings under Section 80C, not all mutual funds
Investors can claim deductions up to ₹1.5 lakh under the old tax regime.
ELSS has a 3-year lock-in, with returns linked to equity markets.
Tax benefits reduce income, but capital gains rules still apply.

What is Section 80 C of the Income Tax Act?

The Finance Act of 2005 introduced Section 80C. The purpose of this section is to provide deductions from total income on account of various expenses/payments, which in turn reduce the tax liability of an individual choosing the Old Tax Regime. There is an upper limit to the deduction under this section of INR 1.5lakhs.

What Mutual Funds are Considered Qualifying Under Section 80C?

Not all mutual fund investments qualify for a deduction under 80C. The primary category that falls under this section is Equity Linked Savings Schemes (ELSS). These funds invest mainly in equities and have a lock-in period of three years. During this lock-in period, you cannot withdraw your investment. Because of this structure, these funds fit within tax-saving rules.

Other mutual fund types, such as debt or hybrid funds, do not qualify for a deduction under section 80C. Additionally, the deduction u/s 80C is only applicable under the old tax regime and not under the new tax regime. Since the new regime is the default for FY 25-26, it is important to check and ensure that you choose the correct regime and file the returns accurately.

How Much Tax Can You Save?

Section 80C of the Income Tax Act offers a deduction of up to ₹1.5 lakh. For instance, if you fall into the 30% tax bracket, a full ₹1.5 lakh investment could save you ₹45,000 in taxes (plus applicable cess), making it a highly effective tool for high-income earners.

This deduction is specifically available only under the old tax regime and serves to lower your taxable income, thereby reducing your overall tax liability. It’s important to note that returns from these investments are subject to applicable tax. Additionally, the ₹1.5 lakh limit under section 80C is a cumulative limit for all the applicable investments, such as PPF, NSC, EPF and more.

What are ELSS mutual funds?

ELSS is a type of mutual fund whose portfolio comprises primarily equity and equity-linked securities. Investments in ELSS can help you achieve your goals of tax saving as well as wealth creation.

ELSS is covered by Sec 80C of the Income Tax Act, and thereby you can save up to INR 46,800 in taxes by investing in the fund (for those in the 30% tax bracket plus cess). ELSS, which offers a low lock-in period of 3 years, attracts investors by offering the potential for attractive returns through the predominance of equity investments.

Compared to the other Sec 80C instruments, ELSS has the potential to offer higher returns and better inflation protection over the long term. Additionally, since these funds have a 3-year lock-in period, the returns classify as long-term capital gains (LTCG). These gains are taxed at 12.5%, beyond the exemption limit of ₹1.25 lakhs.

Options of ELSS Funds

There are 2 options that you can choose from: the Growth option and the Income Distribution cum Capital Withdrawal (IDCW) option.

Growth Option

Investors can create long-term wealth by investing in the Growth Option. When the fund is sold, you can realise the entire accumulated capital appreciation.

IDCW (Formerly Dividend) Option

There are two subcategories of IDCW: Payout and Reinvestment. When you opt for IDCW Payout, you will receive periodical payments; however, these are now taxable at your applicable income tax slab rate. When you choose IDCW Reinvestment, the distribution is reinvested into the scheme to purchase more units. Note that each reinvested amount starts a fresh 3-year lock-in period.

Factors to Consider When Investing in ELSS

To make a wise call about investing in ELSS mutual funds, you need to consider the following factors:

Duration of Investment

If you plan to invest in ELSS funds, you should ideally have a holding period of five to seven years. Because ELSS funds are exposed to equity market volatility, you need a longer investment horizon in order to mitigate short-term risk and allow the power of compounding to work.

Return Expectations

ELSS funds have no guarantee of returns because their performance is entirely based on the performance of the underlying securities they invest in. However, historically, a longer investment period can yield higher returns than other tax-saving instruments under Section 80C.

Lock-in Period

A mandatory lock-in period of three years applies to ELSS mutual funds. As soon as you invest, your holdings are locked in for three years, and you will not be able to redeem them before the expiration of this period. In the case of a Systematic Investment Plan (SIP), every individual instalment is locked for three years from the date of that specific transaction. So, ensure that you do not invest capital that you might need within the next three years.

Best ELSS Mutual Funds

Here are some of the top-performing ELSS mutual funds (growth plan) based on 3-year CAGR:

Name	3 Year CAGR	AUM	Expense Ratio
Motilal Oswal ELSS Tax Saver Fund	26.33%	₹4,174.50	0.69
SBI ELSS Tax Saver Fund	22.79%	₹28,441.43	0.99
SBI LT Advantage Fund-V	22.65%	₹319.57	-
WOC ELSS Tax Saver Fund	21.54%	₹402.93	0.64
ITI ELSS Tax Saver Fund	20.98%	₹368.57	0.56
HSBC ELSS Tax Saver Fund	20.45%	₹3,561.32	1.16
Baroda BNP Paribas ELSS Tax Saver Fund	20.30%	₹808.58	1.01
DSP ELSS Tax Saver Fund	20.19%	₹15,044.13	0.70
HDFC ELSS Tax Saver Fund	20.06%	₹14,615.19	1.10
Sundaram LT Tax Adv Fund-Sr IV	20.04%	₹19.36	1.26

Disclaimer: The above figures are as of April 20, 2026 and subject to change.

FAQs

Which SIP is Tax-Free Under 80C?

Only SIPs in Equity Linked Savings Schemes (ELSS) are eligible for deductions under Section 80C. This deduction can help lower your taxable income by up to ₹ 1,50,000, provided you are under the old tax regime. Please note that while the investment amount qualifies for deduction, the returns are subject to tax.

Should I invest in tax-saving funds?

Tax-saving funds, like ELSS, are ideal for individuals choosing the old tax regime, looking to save taxes while aiming for long-term wealth creation through equity investments. However, if you are under the new tax regime, ELSS does not provide any additional tax-saving benefits.

How do tax-saving mutual funds work?

Tax-saving mutual funds, such as ELSS, allow investors to claim deductions under Section 80C of the Income Tax Act while investing primarily in equity and equity-linked securities. These funds offer the potential for higher returns and have a mandatory lock-in period of three years. In the case of SIPs, it is important to remember that each individual monthly instalment is locked for exactly three years from the date of that specific investment.

How do I get an 80C certificate for mutual funds?

To claim 80C mutual funds, you can download the investment statement or tax certificate from the fund statement or account summary. This document shows the amount invested in eligible schemes. It can be used as proof while filing income tax returns under Section 80C.

How do I claim tax on mutual funds?

To claim tax benefits, include your eligible investments under the mutual fund deduction under 80C while filing returns. Enter the amount invested in qualifying schemes such as ELSS under Section 80C. The deduction reduces your taxable income. Keep your investment statements ready as proof. Tax on returns, such as capital gains, must be reported separately based on holding period and applicable rules.