ELSSs have been among the favourite tax-saving option of mutual fund investors. Under section 80C, investment in ELSS allows an investor to claim an exemption of up to Rs 1.5 lakh in a financial year.
However, the new tax regime proposed in Budget 2020-21 makes it optional for taxpayers to claim such exemptions. Instead, the Budget gives taxpayers the option of lower tax rate slab if they forego various exemptions and deductions.
This has put ELSS in the spotlight. Let us understand how this new tax regime will change the road ahead for ELSS, a category that has currently more than Rs 1 lakh crore AUM.
ELSS is an attractive tax saving option as it serves the twin objective of tax savings along with capital appreciation, feel experts. All other tax saving options are either debt-oriented and have longer lock-in periods.
Swarup Mohanty, CEO, Mirae Asset MF said that the new personal income tax slabs could be negative for ELSS and other tax saving products such as PPF, NPS and insurance. Investors who like convenience and simplified tax filing process could prefer the new tax regime.
However, if the MF industry highlight the advantages of ELSS i.e. potential to create wealth in long term with the flexibility of a multi-cap fund, investors could still look ELSS as an attractive product.
Suresh Sadagopan of Ladder7 Financial Advisories has a similar view. He said that ELSS has generated good returns for investors over the long term compared to other tax saving options.
Further, the new tax regime, which has lower tax slab than the prevailing one is not suitable for everyone. Investors who avail deductions and exemptions under insurance schemes, invest in ELSS, LTA (Leave Travel Allowance), HRA (House Rent Allowance), interest on housing loan on self-occupied property, standard deduction can save more in the existing tax regime. These investors are better off not migrating to the new tax regime, Sadgopan added.
On the other hand, the new tax regime is appropriate for investors who cannot save enough to invest and want more money at their disposal.
IFA Sadashive Phene is of the view that following the introduction of new tax slabs, the role of advisors has become more important. Advisors have to change their pitch on ELSS. They have to highlight the potential of ELSS to generate capital appreciation in the long-term, rather than viewing it as a mere tax saving option.
