ELSS: Best Bet for the Salaried Class

Earlier this year, when interim Finance Minister Piyush Goyal proposed new income tax benefits for the middle-income group in the union budget, he was applauded by everyone. However, there was some misunderstanding, which cropped up following the tax rebate announcement. Most publications and even the experts could not spot it.

The catch was that, while individual taxpayers earning up to Rs 5 lakh will get a full tax rebate under Section 87A and will not be required to pay any income tax, those earning above Rs 5 lakh will be required to pay the entire tax on the existing slabs.

The only benefit for them are the standard deductions, which has been increased from Rs 40,000 to Rs 50,000. However, the Income Tax Act, 1961 provides several ways of deductions under different sections of the Act, to help salaried individuals invest to reduce the tax outgo. Out of all the investments, Equity Linked Savings Schemes (ELSS) has lately emerged as the most popular tax-saving instrument under section 80C for many new investors. But, with the new changes it is important to revisit if ELSS is still the right choice for you.

Earning Less than RS 5 LPA, ELSS is a big No-No

ELSS is a purpose-based tax saving Mutual Fund and making investments in it qualifies for tax deductions only up to RS 1.5 lakh under the Section 80C of the Income Tax Act. In fact, a lot of new investors get into mutual funds via ELSS only to claim tax deduction every financial year.

So, with the new rebate in place, for salaried individuals earning 5 lakhs or less, investing in ELSS makes no sense anymore as there is no additional tax saving that will happen and ELSS funds come with a lock-in period of three years from the date of investment. It means that if they start a Systematic Investment Plan (SIP) in an ELSS fund today, their money will just stay stuck and they will not be able to redeem it before the completion of three years from the respective date of investment.

So, instead of locking the money unnecessarily, it would be better to invest the same money in diversified Mutual Funds as per the risk profile and in consultation with their financial advisors.

Since, it has been witnessed that returns generated by ELSS category are similar to the likes of multi cap schemes in the time period of one, three, five and 10-years, it is better to look at these categories of equity mutual fund schemes that may provide good returns and help in reaching the financial goals on time.   

Income above Rs 5LPA? ELSS is the best way out.

The new tax regime brings no difference in the tax liability for individuals earning beyond Rs.5 LPA, except the increase of Rs. 10,000 in the standard deduction. For them, investing in ELSS regularly through SIPs or lumpsums will not just enable them to reap 80C tax benefits but will also maximise the returns in the long run.

However, considering they are equity schemes, investors must remember that they can be risky and hence should be careful about the lock-in period and risk appetite before starting to invest.

Yet another crucial aspect investors should keep in mind is to not withdraw the money after the 3-year lock-in period is over.  While this is a common practice, one should be prepared to keep investing for at least five to seven years as these are Equity Mutual Funds and sometimes the returns in a time span of 3 years can be disappointing. Such equity schemes start performing well between the periods of 3-5 years.  Therefore, individuals should continue investing for at least five years or even beyond to gather good returns.

Conclusion

ELSS funds are definitely a great way for the salaried individuals to save a lot on their tax outgo. However, it is important to consider all the aspects of these funds and bear in mind that the returns may not be guaranteed. While, there are several investment options eligible for deductions under section 80C (e.g. Employees’ Provident Fund, life insurance premium, housing loan and education loans), a SIP in a well-performing ELSS fund can do wonders to your future financial health.

The author is the Co-Founder and CIO, Goalwise.com