Equity-linked savings schemes (ELSS), once among the most popular tax-saving investment options for salaried individuals, are increasingly facing a crisis of relevance as more taxpayers shift to the new tax regime.

According to data from the Association of Mutual Funds in India (AMFI), ELSS funds recorded net outflows of ₹650 crore in May, marking the fifth consecutive month of redemptions in 2026. The category has now seen outflows in 13 of the last 14 months, highlighting the changing preferences of investors.

The trend comes as the new tax regime gains wider acceptance. Unlike the old regime, it does not provide deductions for investments made under Section 80C, effectively removing one of the biggest incentives that drove investments into ELSS funds.

ELSS versus Tax Saver FD

For investors continuing with the old tax regime, the choice often comes down to ELSS funds and Tax Saver Fixed Deposits (FDs), both of which qualify for deductions of up to ₹1.5 lakh under Section 80C.

Tax Saver FDs, offered by banks, provide guaranteed returns and protect the principal amount, making them attractive for conservative investors. Interest rates currently range between 6% and 8%, but the investments come with a mandatory lock-in period of five years.

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ELSS funds, in contrast, invest predominantly in equities and therefore carry higher risks. Returns are linked to stock market performance and are not guaranteed. However, the category has historically delivered annual returns of 12-16%, significantly higher than those offered by fixed deposits.

Another advantage is the shorter lock-in period. ELSS investments are locked in for three years, making them the shortest lock-in tax-saving instrument available under Section 80C.

Performance compared

The sustained redemptions do not appear to be driven by poor performance.

According to Value Research data, ELSS funds generated an average three-year compound annual growth rate (CAGR) of 12.42%, only slightly lower than the 12.75% delivered by flexi-cap funds.

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The numbers indicate that investors are withdrawing money not because of weaker returns, but because the category's tax-saving proposition has diminished under the new regime.

Who should choose what?

Tax Saver FDs are more suitable for investors who prioritise capital protection and predictable returns. They appeal to retirees and risk-averse investors seeking stability.

ELSS funds, on the other hand, are better suited to investors with a long-term horizon and a higher tolerance for market volatility. They also remain attractive for taxpayers opting for the old tax regime and looking to combine tax savings with wealth creation.

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Are ELSS funds becoming irrelevant?

Industry experts believe ELSS funds are unlikely to lose relevance entirely, but their role in portfolios is evolving.

Before the introduction of the new tax regime, ELSS occupied a unique position as the only mutual fund category offering tax deductions. Today, investors are increasingly evaluating the schemes based on returns rather than tax benefits.

As a result, ELSS may gradually transition from being primarily a tax-saving product to becoming a long-term equity investment option. While its dominance under Section 80C may be fading, the category's potential for wealth creation and shorter lock-in period ensure that it still has a place in the portfolios of growth-oriented investors.