30 Sep 2020
Features of ELSS investments
Since the last few years, Equity Linked Savings Scheme (ELSS) has become a popular tax-saving investment option. As the name suggests, ELSS are mutual funds that invest in equity (stocks) or equity-related financial instruments (options, futures, etc.). There is a compulsory lock-in period of three years.
Section 80C of the Income Tax Act, 1961 allows for investing a maximum of Rs. 1,50,000 under various ELSS mutual fund schemes. In the union budget of 2020, the Indian Government has proposed some changes in the taxation scheme. Here is the comparison between the New and Old Tax Regime.
|Income (In Rs.)||
Tax rates (%) as per Old Tax Regime
Tax rates (%) in New Tax Regime
(Devoid of exemptions and deductions)
|Age <60 years||Age >=60 &<80 years||Age >=80 years|
|up to 2.5 lakh||Nil||Nil||Nil||Nil|
|2.5 to 3 lakh||5||Nil||Nil||5|
|3 to 5 lakh||5||5||Nil||5|
|5 to 7.5 lakh||20||20||20||10|
|7.5 to 10 lakh||20||20||20||15|
|10 to 12.5 lakh||30||30||30||20|
|12.5 to 15 lakh||30||30||30||25|
|Above 15 lakh||30||30||30||30|
*The tax calculated above will be subject to an applicable surcharge and 4% Health & Education Cess.
In the New Tax Regime, the income tax rates for the income group below 15 lakhs have been reduced. However, the new tax rates will be applicable after you give up exemptions and deductions provisioned under the Income-tax Act, 1961.
If you opt for New Tax Regime, you will have to give away exemptions like Leave Travel Allowance (LTA), House Rent Allowance (HRA), and so on. Also, deductions available under Section 80 will go away. You can only claim for deduction under Section 80CCD (2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for employing new employees].
Not only that, Standard Deduction under Section 16 [which is currently Rs 50,000] for salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed.
In the case of ELSS, income earned at the end of the lock-in period is treated as Long Term Capital Gains (LTCG) and is liable to be taxed at 10% if the gains exceed Rs. 1,00,000 without indexation.
Lump-sum and SIP – Two types of ELSS investment route
There are two ways to invest in ELSS mutual funds –
Lump-sum - An individual can invest the entire amount in one go or
Systematic Investment Plan (SIP) – Regular investment of a smaller amount throughout the year
Which investment approach is right for you?
Both investment approaches have their own pros and cons, but fundamentally, any approach could be selected based on the following parameters:
Equity market experience - SIPs are apt for new/casual investors as they are non-savvy towards the underlying fundamentals of equity markets. Meanwhile, experienced investors usually opt for the lump-sum approach.
Financial liquidity – Individuals running a business or receiving windfall gains can choose to invest a lump sum amount at a go to capitalize on favorable market conditions. On the other hand, salaried individuals can opt for SIPs to invest a fixed amount regularly in a disciplined manner.
Risk-taking appetite – For individuals with a low-risk appetite, SIP is the best route as it averages the impact of equity market dynamics over the long run. Lump-sum investment can prove to be risky if entry and exit are not appropriately timed.
Tenure - ELSS mutual funds have a compulsory lock-in period of 3 years. In the case of the lump-sum investment scenario, the redemption will be possible three years after the date of investment. Contrarily, to this for SIP in ELSS, a three-year calculation is applicable for each SIP done.
To understand this better, consider two ELSS investments at the start of a financial year- a lump-sum investment of Rs. 60,000; and a monthly SIP of Rs. 5,000 for a period of 12 months. While lump-sum ELSS investment will be available for redemption at the end of the third year, SIP investments can be redeemed one by one each month, and the full amount will unlock by the end of the fourth year.
ELSS investments help you realize equity-linked gains while providing tax benefits under Section 80C of the Income Tax Act, 1961. Choose the investment route, whether lump-sum of SIP, based on your experience, current financial situation as well as risk-taking appetite. You can use the following Wealth Builder Calculator for your financial planning or seek advice by getting in touch with us.