Income Tax: Why should you invest in ELSS & tax saving bonds to save tax?

If you are a retail investor and intend to claim income tax benefits via investments -- there are multiple options to do so. Although you can invest in small savings schemes to claim tax deduction upto ₹1.5 lakh under section 80C. Besides this, you can claim tax benefits by investing in equity schemes and bonds as well.

Investors can claim income tax benefits via investing in equity as well as debt. In equity, one can opt for equity linked savings scheme (ELSS). And in terms of bonds, investors can opt for tax deduction under section 54EC (capital gain bonds).

Two key investment options investors can opt for:

I. ELSS (Equity linked savings scheme): It is an investment option which has a total lock-in period of three years. The income tax deduction is permitted under section 80C upto the maximum cap of ₹1.5 lakh per financial year.

However, it is noteworthy to mention that this tax benefit is not permitted in the new tax regime.

Overall, there are 43 ELSS (open-ended) schemes with total AUM of ₹2.32 lakh crore in the entire mutual fund universe. Additionally, there are 18 close-ended ELSS schemes with total AUM of ₹4,250 crore, shows the latest AMFI (Association of Mutual Funds in India) data as on Jan 31, 2025.

This benefit --along with other benefits of section 80C – are given under section 123 of New Income Tax Bill, 2025. 

For details, you can find section wise utility here.  

II. Exemption under section 54EC: These are also known as capital gain bonds. Investment in these bonds allows investors to defer or eliminate capital gains tax on long-term assets.

These assets are issued by infrastructure entities such as National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). This benefit is given under section 85 of the New Income Tax Bill, 2025.  

Notably, most tax benefits such as those given under section 80C, 80CCD, 80G are also not allowed in the new tax regime. In the new regime, only a few deductions such as deduction under sections 80CCD(2), 80CCH and 80JJAA are allowed.

“Although most redundant sections have been phased out in the new income tax Bill but deduction against capital gain bonds is still allowed,” says CA Chirag Chauhan, a Mumbai-based chartered accountant. 

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.