As the new income tax regime comes into force starting FY 2023-24, investors will have a lower incentive to invest in the tax-saving schemes such as PPF, NSC, tax saving fixed deposits, SCSS, NHB deposit scheme and Equity Linked Savings Scheme, or ELSS.
Although the new tax regime gives an incentive of paying income tax at lower rates, you stand to lose eligibility to claim deductions that are given under section 80C or 80D of the Income Tax (I-T) Act, 1961.
So, should investors continue to invest in ELSS which usually have only one big incentive for tax-payers i.e., of saving income tax?
But before we proceed, let us describe what are ELSS?
What is ELSS?
Equity-linked savings schemes represent a category of mutual funds that enable investors to claim tax deductions under Section 80C of Income Tax Act, 1961. These schemes invest primarily in equity and equity-linked financial securities.
Viral Bhatt, Founder, Money Mantra said, “ELSS funds are helpful for both immediate and long-term objectives. ELSS funds have a shorter lock-in period of three years.”
There are 42 ELSS schemes with net assets under management (AUM) of ₹1.57 lakh crore as per AMFI data as on April 30, 2023.
Should you still invest in ELSS?
The average returns of ELSS schemes were 16.03 percent and 27.80 percent in the past one and three years, respectively, shows the Morning Star data as on May 28, 2023.
We spoke to some experts to find out if investing in ELSS is a rational thing to do without income tax exemption.
Some believe that this is likely to have a significant impact on the inflow into ELSS but investing in one scheme should have other reasons besides tax saving.
Preeti Zende, a Sebi-registered financial advisor and founder of Apna Dhan Financial services, said, “Going ahead, ELSS funds may not receive much inflow as many mid-range earners opt for the new tax regime. As far as investments are concerned, one should not do this only for saving taxes but to fulfil the financial goals. ELSS is still good for those who want to invest in the equity asset class as well want to have discipline in investing.”
“As investment done in ELSS cannot be redeemed in 3 years it makes investors stay invested in equity at least for 3 years to make some profits. So, if you want to get disciplined in investment and also want to allocate funds as per asset allocation requirements for your financial goals then ELSS funds are still better,” she adds.
Sridharan Sundaram, Founder of Wealth Ladder Direct offers a different viewpoint when he says, “ELSS should be seen only for the purpose of tax saving. Otherwise, there is no point locking in for three years. There are a lot of open-ended schemes, and you can good generate returns from them. and when they do not perform well, you are entitled to exit the schemes.”
“However, investors who are lazy and not disciplined can invest in ELSS. But one thing that needs to be considered is that the three-year period of lock in begins the day of last SIP.”
“For instance, when you opt for 12-month SIPs, the three-year lock in SIP becomes 4-year SIP because each SIP is to be seen as a separate investment.”
