As many individuals move to the new income tax regime, investment advisers said the product category might find fewer takers compared to the past. Though a large section of the ELSS has managed to beat benchmarks in recent years, investors would be unwilling to lock their money into the product in the absence of tax benefits, they said.
Investors, who opt for the new tax regime, have been offered concessional tax rates but cannot claim deductions under Section 80C of the Income Tax Act. To save taxes every year under the old tax regime, individuals have several product options such as ELSS, Public Provident Fund (PPF) and Unit Linked Insurance Plans (ULIPs) among others. PPF, which is a debt product, and ELSS, which invests in stocks, are quite popular as tax savers. While PPF has a 15-year lock-in, investors in ELSS cannot pull money out before three years.
“In the new tax regime, investors would now choose diversified equity mutual fund schemes which do not lock in their money and give them more flexibility over ELSS,” said Dev Ashish, founder of Stableinvestor, a SEBI-registered investment advisor. “This is because most retail investors typically use systematic investment plans (SIPs) for investments and in ELSS, each instalment is locked in for three years which disturbs liquidity.”
ELSS manages ₹1.57 lakh crore in assets. The mutual fund industry manages equity assets to the tune of ₹15.50 lakh crore.
Investment advisors said the demographics will soon be less conducive for locking money into ELSS.
“A large chunk of people who enter the workforce will opt for the new tax regime as it is the default option and income up to ₹7 lakh per annum will be tax-free,” said Jitendra Solanki, a SEBI-registered investment advisor.As per data from Value Research, over a three-year period, the ELSS category on average has returned 26.49% every year as against the benchmark Nifty’s gains of 26.87%. Over a five- and 10-year period, they have returned 10.59% and 14.47%, respectively, as against Nifty’s gains of 12.14% and 12.6%, respectively, in the period.
The prospects of higher returns from the stock market drew many young investors to ELSS. Middle-aged and those above 50 years opted for conservative options like the public provident fund (PPF) where interest income is tax-free.
“ELSS has been a stepping stone for many first-time equity investors as they got benefits of tax saving as well as allocation to equity as an asset class,” said Ashish.
Several investors also preferred ELSS as it had the lowest lock-in period of three years and it gives investors the benefit of long-term capital gains tax, which is taxed at 10%. In comparison, PPF has a tenure of 15 years, but interest income is tax-free on maturity.
Mutual fund officials said it is not curtains yet for ELSS for asset managers who are able to offer differentiated strategies. The lock-in of three years in ELSS could give fund managers the chance to take differentiated bets or play special situations.
“ELSS schemes give the fund manager money for three years which helps fund management, and hence, one sees differentiated strategies here,” said Swarup Mohanty, CEO of Mirae Asset Management. “Even if one does not want 80C benefit, it will remain a good investment avenue for all investors.”
