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When it comes to tax-saving and investment, Equity Linked Savings Schemes (ELSS) have long been a popular option for Indian investors. They not only offer deductions under Section 80C of the Income Tax Act, 1961 but also provide an opportunity to grow your wealth through equity exposure. Traditionally, ELSS funds were actively managed, meaning fund managers made buy-and-sell decisions to outperform the market. But now, with the introduction of passive ELSS mutual funds, investors have a simpler, cost-effective alternative.
Passive ELSS funds are index-based tax-saving mutual funds that aim to replicate the performance of a benchmark index like the Nifty 50 or Nifty LargeMidcap 250. These funds don't rely on the fund manager's stock-picking skills—instead, they mirror the index exactly as it is. This means lower expense ratios, no fund manager bias, and a more predictable performance aligned with market trends.
If you're looking for a straightforward way to save taxes, reduce investment costs, and participate in long-term market growth, a passive ELSS fund could be the perfect fit. In this blog, we’ll explore what they are, how they work, their benefits, risks, and how you can start investing in them confidently.
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What are Passive ELSS Funds?
Passive ELSS funds are a type of tax-saving mutual fund that invest in equity markets by tracking a specific index, such as the Nifty 50 or Nifty LargeMidcap 250. These funds aim to mirror the performance of their benchmark index rather than trying to beat it. That’s why they’re called “passive.”
What makes them attractive is their low-cost structure, as there’s no active stock picking involved. Introduced after a SEBI circular in May 2022, passive ELSS mutual funds are now available for investors looking to combine long-term wealth creation with tax savings under Section 80C of the Income Tax Act.
An ELSS passive fund comes with a lock-in period of three years and can be a great choice for those seeking simple, transparent, and cost-effective investment options in mutual funds.
Working of Passive ELSS Funds
Passive ELSS funds work by replicating the composition and performance of a specific market index, such as the Nifty 50 or Nifty LargeMidcap 250. Instead of trying to outperform the market, these funds aim to match the returns of the index they track.
The fund manager invests in the same stocks and in the same proportion as listed in the index. For example, if Infosys holds a 5% weight in the index, the fund will allocate 5% of its assets to Infosys. The portfolio is periodically rebalanced to stay aligned with the benchmark index.
This strategy removes fund manager biases and reduces costs, as there’s no need for active research or frequent trading. In short, passive ELSS mutual funds offer a simple, low-cost, and disciplined approach to investing while still allowing you to claim tax deductions under Section 80C.
Key Features of Passive ELSS Funds
Passive ELSS mutual funds combine the benefits of tax-saving with the simplicity of index investing. Here are some of their key features:
Index-Tracking Strategy: These funds follow a specific market index like the Nifty 50 or Nifty LargeMidcap 250. The fund mirrors the index by investing in the same companies, in the same proportions.
Tax Benefits: Investments up to ₹1.5 lakh in a financial year qualify for tax deductions under Section 80C of the Income Tax Act, helping investors reduce their taxable income.
Low Expense Ratio: Since there’s no active stock-picking involved, passive ELSS funds may have a much lower expense ratio compared to actively managed ELSS funds.
Three-Year Lock-in: Like all ELSS schemes, passive variants also come with a mandatory lock-in of 3 years, offering long-term discipline in investing.
No Fund Manager Bias: With no active intervention, the investment process is completely rule-based and transparent.
Diversified Exposure: By tracking broad indices, these funds offer exposure to top-performing companies across sectors.
In essence, a passive ELSS fund offers a hassle-free, cost-effective way to grow your wealth while saving on taxes.
Advantages and Risks of Investing in Passive ELSS Funds
Advantages of Investing in Passive ELSS Funds
Tax Savings under Section 80C
One of the biggest reasons investors opt for passive ELSS mutual funds is the tax benefit. You can claim a deduction of up to ₹1.5 lakh per financial year under Section 80C, helping you save up to ₹46,800 in taxes.
Low Expense Ratio
Passive ELSS funds don’t require active stock-picking or deep research, which brings down the management cost. This lower expense ratio means more of your returns stay with you. For instance, some funds like the Navi ELSS Tax Saver have expense ratios as low as 0.10%.
No Fund Manager Bias
Since these funds simply track an index, there's no influence of a fund manager’s personal judgment or investing style. This results in a more predictable and transparent investment experience.
Diversification
By mirroring a benchmark index like the Nifty 50 or Nifty LargeMidcap 250, passive ELSS funds automatically provide diversified exposure across multiple sectors and companies.
Suitable for Beginners
Their simplicity makes them ideal for first-time investors who want a hands-off investment approach with decent returns and tax benefits.
Risks of Investing in Passive ELSS Funds
Market Risk
Just like any equity investment, passive ELSS funds are subject to market volatility. If the index falls, your fund value will also decline. There's no cushion from active management to minimize losses during downturns.
No Outperformance
These funds are designed to match, not beat, the market. If you’re looking for alpha (excess returns over the index), passive ELSS may not be suitable.
Limited Fund Options
As of now, the passive ELSS funds list in India is small. SEBI regulations prevent AMCs from offering both active and passive ELSS, which limits investor choice.
Lock-in Period
Like all ELSS investments, passive funds also have a three-year lock-in, restricting access to your money during this period.
Index Dependence
Performance is tightly tied to the index. If the chosen index underperforms, the fund does too, without the flexibility to adjust holdings.
Overall, a passive ELSS fund offers simplicity, tax efficiency, and cost advantages—but investors should weigh these benefits against market risks and lack of flexibility.
Who Should Invest in Passive ELSS Funds?
Passive ELSS funds are best suited for investors who want to save taxes while adopting a simple, cost-effective investment strategy. If you prefer a hands-off approach and don’t want to worry about market timing or stock selection, passive ELSS mutual funds could be a perfect fit.
These funds are ideal for:
- First-time investors looking for an easy entry into equity markets.
- Salaried individuals who want to claim tax deductions under Section 80C.
- Cost-conscious investors who want lower expense ratios compared to actively managed funds.
- People who believe in the Efficient Market Hypothesis, which suggests that it’s difficult to consistently outperform the market.
- Long-term investors aim to grow wealth steadily over time without taking excessive risks.
Since passive ELSS funds follow a market index, they offer broad market exposure, transparency, and stable returns over the long run. However, they may not appeal to those seeking to outperform the market or who are uncomfortable with equity market fluctuations.
If you’re looking for a reliable, low-maintenance investment that helps with both tax saving and wealth creation, a passive ELSS fund is worth considering.
Things to Consider Before Investing in Passive ELSS Funds
Before investing in a passive ELSS fund, it’s important to keep a few key points in mind.
- Expense Ratio: Look for funds with a low expense ratio to maximize your returns. Passive funds usually have lower costs than active ones.
- Index Type: Understand which index the fund tracks—Nifty 50 is large-cap focused, while Nifty LargeMidcap 250 includes a wider range of stocks and carries higher risk.
- Lock-in Period: Like all ELSS schemes, these funds have a 3-year lock-in. Plan your liquidity needs accordingly.
- Fund Size & Track Record: Although new, check the fund’s AUM and how well it replicates the benchmark.
- Risk Appetite: Ensure the fund’s risk profile aligns with your goals and comfort level.
Evaluating these factors will help you make an informed investment decision in passive ELSS mutual funds.
Understanding Taxability of ELSS Funds
ELSS (Equity Linked Savings Scheme) funds, including passive ELSS mutual funds, offer attractive tax benefits and efficient long-term returns. One of their biggest advantages is the eligibility for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakh in a financial year, which can reduce your tax liability by up to ₹46,800 if you fall in the highest tax bracket.
ELSS funds come with a mandatory lock-in period of three years, which also means that gains are treated as long-term capital gains (LTCG). There is no short-term capital gains (STCG) tax applicable because you cannot redeem before the 3-year lock-in.
When you redeem your investment after three years, the LTCG up to ₹1.25 lakh in a financial year is tax-free. However, gains exceeding ₹1.25 lakh are taxed at 12.5% without indexation benefits.
This makes ELSS funds not just a smart tax-saving tool but also a tax-efficient investment option for long-term wealth creation. Whether you invest in an active ELSS or a passive ELSS fund, the tax treatment remains the same.
Always factor in both deduction benefits and exit taxation when planning your ELSS investments.
List of Best Passive ELSS Funds in India
If you're looking to invest in passive ELSS mutual funds, there are currently a few quality options available in the Indian market. These funds not only offer tax-saving benefits under Section 80C but also provide exposure to well-established indices at a low cost.
Here is the updated passive ELSS funds list based on expense ratios, benchmark indices, and fund size:
| Fund Name |
Benchmark Index |
Expense Ratio (%) |
AUM (₹ Crore) |
Ideal For |
| Navi ELSS Tax Saver Nifty 50 Index Fund |
Nifty 50 TRI |
0.10 |
73.32 |
Conservative investors wanting large-cap exposure with minimal cost |
| 360 ONE ELSS Tax Saver Nifty 50 Index Fund (Direct) |
Nifty 50 TRI |
0.27 |
78.71 |
Long-term investors looking for reliable large-cap investments |
| Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund (Direct) |
Nifty LargeMidcap 250 TRI |
0.25 |
145.11 |
Investors with moderate-to-high risk appetite seeking large & mid-cap growth |
These passive ELSS options are gaining popularity due to their low expense ratios and straightforward structure. Choose one that best aligns with your investment goals and risk profile.
How to Invest in Passive ELSS Funds?
Investing in passive ELSS mutual funds is simple and can be done entirely online. Here’s a step-by-step guide to help you get started:
Open an Investment Account
You’ll need a demat account with a brokerage or investment platform like Zerodha, Kuvera, Groww, or Angel One. If you don’t have one, opening an account takes just a few minutes with your PAN, Aadhaar, and bank details.
Research and Choose a Fund
Explore the available passive ELSS funds list and compare them based on:
- Expense ratio
- Index tracked (Nifty 50 or Nifty LargeMidcap 250)
- AUM and past performance
- Risk level
Decide How to Invest
You can invest either as a lump sum or via Systematic Investment Plan (SIP). SIPs help you invest regularly and average out market volatility.
Complete KYC
Ensure your KYC is verified. Most platforms offer a seamless online process.
Start Investing
Choose the fund, investment amount, and payment mode. For SIPs, set up an AutoPay for hassle-free monthly contributions.
Once done, your investment begins tracking the index, and you can enjoy both tax savings and potential long-term returns.
Conclusion
Passive ELSS funds have opened up a new chapter in tax-saving investments by offering a simple, low-cost, and transparent route to participate in the equity markets. For investors who prefer minimal intervention and believe in the long-term growth of the Indian economy, these funds provide an excellent way to combine tax savings with steady wealth creation.
By tracking benchmark indices like the Nifty 50 or Nifty LargeMidcap 250, passive ELSS mutual funds eliminate fund manager biases and reduce costs through lower expense ratios. With benefits like deductions under Section 80C, a 3-year lock-in for disciplined investing, and market-mirroring returns, they suit both first-time investors and seasoned professionals looking for efficient tax planning.
While they may not beat the market, they can certainly help you match it—at lower cost and lower risk. If you want a dependable, long-term tax-saving tool, a passive ELSS fund is worth considering.
