Equity-Linked Saving Schemes, popularly known as ELSS, are tax-saving instruments offered by various mutual fund houses. ELSS funds are the only class of mutual funds that are eligible for tax deductions under Section 80C  of the Income Tax Act, 1961. Since ELSS funds predominantly invest around 80% of their corpus in equity and equity-related securities, they are often associated with significantly reasonable returns.

These tax-saver mutual funds are undoubtedly one of the best bets if you are keen on earning substantial tax rebates and simultaneously potentially growing your wealth in the long-term. However, with the introduction of the Union Budget 2020, there has been a slight change in the arrangement.

Under the new income tax regime, individuals can opt for lower tax slabs but lose the right to claim various exemptions and deductions offered under Section 80C of the Income Tax Act, 1961, including ELSS funds.

Investors are now perplexed if they should rely on the old scheme with the higher tax slabs which offers deductions/exemptions or opt for the newly defined tax structure that attracts lower tax with no deductions/exemptions.

But before evaluating which tax regime best suits your needs, let’s understand how investments in ELSS funds could be affected with the introduction of the Union Budget 2020.

Under the old tax structure, investors can invest up to Rs1.5 lakh in ELSS funds and avail tax savings of approximately Rs46,800 (assuming the highest slab of income tax i.e. @30% plus 4% Health & education cess excluding surcharge as applicable).

Choosing between the old or the updated scheme should depend on the tax slab you are currently in. If you belong to the lower tax slab of Rs9 lakh, it’ll make more sense to opt for the traditional scheme and invest in ELSS funds as your income tax liability would be lower.

However, if your income is over Rs9 lakh, the new scheme could work to your benefit as your tax liability will be lower in that case.

Let’s understand this better by comparing the two schemes across various income slabs:

Individuals can consider their annual income and tax liability under both regimes and choose one that falls in line with their investment objectives.

You should keep in mind that if you redeem your ELSS mutual fund investment after the 3-year lock-in period, you are mandated to pay long-term capital gains (LTCG) tax. The profit made on the sale of investments in an equity-oriented mutual fund scheme, (i.e. scheme investment holding more than 65% of its corpus in equity shares of domestic companies listed on a recognised stock exchange) held for over 1 year, is classified as a long-term capital gain. LTCG on equity-oriented funds/equity shares for gains exceeding Rs1 lakh in a given financial year is taxed at 10% (plus surcharge as applicable plus 4% Health & education cess), without the benefit of indexation.

Despite the ELSS tax benefits offered to investors, individuals are attracted to these tax-saving investments for other reasons as well. For investors looking for greater flexibility in their mutual fund investment  strategy, ELSS funds can be a one-stop solution. Unlike other tax-saving investments, you can shift to a new mutual fund or change your plan if you are not satisfied with your current scheme’s investment strategy.

ELSS funds are considered an ideal bet for new investors hoping to gain exposure to the world of equity mutual funds. It is always advised to link your ELSS investments to your long-term financial goals. This helps you to focus on your investment goals rather than panicking about the volatility associated with stock markets. Always consider your risk appetite, investment horizon, and financial objective before zeroing on a particular investment. Happy Investing!

^{*Mutual fund investments are subject to market risks and actual returns may vary!}

The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme