Tax has always been a deciding factor for many while choosing investment avenues. Equity-linked savings scheme (ELSS) has been among the most sought-after tax-saving products. Interestingly, exactly 30 years after its launch, it might lose its sheen, thanks to the government’s intent of moving towards the new tax regime, which doesn’t allow deductions on tax-saving investments. “The Budget proposes to move to a clutter-free new tax regime,” writes State Bank of India (SBI) in its budget report.
That could push people towards the new tax regime. “The increase in the tax slabs under the new regime may prompt taxpayers to shift to it,” says Ashish Patil, head, product and strategy, LIC Mutual Fund.
Once that happens, the dynamics for ELSS could change.
A Favourite With Investors
ELSS, which comes with a three-year lock-in period, qualifies for a deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961.
It is now among the most popular tax-saving instrument. According to data from the Association of Mutual Funds in India (Amfi), as on February 1, 2023, ELSS is the largest category in terms of the number of folios—ELSS has 14.6 million folios out of the total 141.1 million folios in the mutual fund industry.
The first ELSS, SBI Long Term Equity Fund, was launched on February 24, 1993. Earlier it was known as SBI Magnum Tax Gain 93. At present, there are 42 ELSS, many of which have delivered superior returns over the years. For instance, SBI Long Term Equity Fund has delivered 15.95 per cent compounded annual growth rate (CAGR) since its inception, according to data from Amfi.
Till 2006, the tax benefit available on ELSS was capped at Rs 10,000 per year. This was raised to Rs 1 lakh in 2006, and finally to Rs 1.5 lakh in 2014.
A Matter Of Choice
ELSS is essentially an equity fund, and once the tax incentive goes away, investors will have no reason to lock in their funds for three years. Rather, they may switch to other schemes.
“Deductions like the one eligible on account of ELSS investments may start losing relevance,” says Nirav Karkera, head, research, Fisdom. Knowing that most investors use it primarily for tax benefits, the demand for the product may slump as more taxpayers migrate to the new tax regime, he adds.
The new tax regime will become the default one from FY2023-24. Those earning up to Rs 7 lakh will not be liable to pay any tax. Even others, who may not have a lot of deductions to claim, may be better off with the new regime. This could reduce the demand for tax-saving instruments, including ELSS.
What Should You Do?
Investors will perhaps need to stop looking at ELSS as just a tax-saving instrument, and instead treat it as an equity instrument. “Investors need to change the way they look at ELSS as a wealth creation tool rather than a mere tax-saving option,” says Patil.
Moreover, since equity is meant for the long term, the three-year lock-in only helps investors inculcate the discipline to stay invested and not take any knee-jerk decisions.