The Budget 2020 offers new, optional income tax slabs with substantially lower rates. Under the proposed new tax regime, investors will have to forego certain tax deductions that were pertinent in the existing tax regime. Traditionally, investors could save tax by up to Rs 1.5 lac in schemes such as ELSS (equity-linked savings scheme) under Section 80C of the Income Tax Act, 1961. An investor could save up to Rs 46,800 each year by investing in ELSS mutual funds. So, does this mean ELSS will lose significance now? But, before we get to that, let us quickly recall what ELSS is.
ELSS tax-saving mutual funds are open-ended funds that invest majorly in equity and equity-linked securities. ELSS mutual funds have a mandatory lock-in of 3 years, the lowest among other investment products covered under Section 80C. The returns are market-linked, and gains are treated as long term and thus, taxed at 10%. Note that long-term capital gains (LTCG) on equity investments, including ELSS funds, are exempt up to ₹1 lac in a financial year.
As these funds offer the dual benefits of tax-saving and capital appreciation, they have witnessed a substantial inflow of investors in recent years. However, with the new tax regime, are ELSS tax-saving mutual funds still an attractive option?
According to most experts, while the government has provided an alternate tax structure for those investors who do not wish to have exemptions, the old tax structure is usually more beneficial.
The old tax regime aids to create savings. Generally, all well-earning investors would prefer continuing in the old regime. Experts believe thatELSS scheme will continue to remain an attractive investment option, especially among the lower income group. This is because the investors experience a drastic reduction in their taxable income after deduction of Rs 1.5 lac.
The comparison between the existing and the new tax regime across different income group demonstrates that the investors might be able to save more tax under the existing regime because of the various deductions and exemptions applicable under the Income Tax Act.
Suppose one wants to invest in a diversified mutual fund scheme with exposure across different industries and market capitalization. In that case, ELSS tax saving funds could be one-stop solution.An investor can put a lump sum or even start investing via SIP (systematic investment plan). However,keep in mind that every SIP investment will have a lock-in period of 3 years.
To conclude, ELSS tax saving funds are diversified equity funds. So, even if the ELSS tax exeption of Rs 1.5 lac is removed, it is a complete investment avenue in itself which can be usedto create wealth in the long run. Hence, ELSS funds shouldn’t be treated any differently than any other equity investment. Hope this addresses your query. You can always choose to consult an expert or a financial advisor who will guide you through your investment journey. Happy investing!