The Equity Linked Saving Scheme or ELSS will no longer provide tax-free yields. If the budget proposal proposes to impose a 10% tax on long-term capital gains of more than Rs 1 lakh, the tax-saving mutual fund will attract a 10% LTCG redemption tax. Should investors continue to bank on tax-saving schemes, or should they have better options?
LTCG tax of 10 percent came into effect from April 1, 2018. It means that the profit of more than Rs 1 lakh is taxed on the sale of these schemes kept for more than one year. If you are worried about paying taxes for a substantial portion of your future profits, then you do not have to worry about that.
Despite LTCG’s slap, ELSS is still, according to expert views, one of the largest retail investor wealth generators in the MF category. We are going to inform you that why ELSS can be the best tax saving option for you to pay LTCG tax.
ELSS Still the Best Option for Retail Investors – As a retail investor, ELSS can be the best tax saving option to invest small amounts regularly that accumulates an excellent return over time. Using Section 80C for tax savings and keeping your investment closed for three years not only generates money but also guarantees that you do not have access to your money during your tenure.
The three-year term is not binding as a public provident fund or savings deposit, which requires pledges of 5 and 15 years, respectively. You can invest up to Rs 1.5 lakh under this section and deduct your taxable income amount.
Flexibility in ELSS – ELSS is better than ULIP for investors who prefer more flexibility in their investment. Under ELSS, if the scheme does not perform as expected, you have the option of changing your plans or moving to another fund. While investing in ULIPs, It is not the case when investing in ULIPs. You can only convert to a different fund offered by ULIPs.
Under Section 80C of the Income Tax Act, ELSS or tax-saving mutual funds qualify for a tax deduction. A person can invest in ELSS and can claim tax deduction up to a maximum of Rs 1.5 lakh in a financial year. However, many investors were primed for ELSS primarily because they received a tax-free yield after a lock-in period of three years. The tax-free situation will change soon.
Although long-term capital gains tax is negative for ELSS, according to mutual fund advisors, investors should avoid any knee jerk reaction. They remind investors that ELSS still has the shortest lock-in period available under the Section 80C basket among many tax-saving investment options.
They can provide better post-tax returns than other options available under Section 80C. The ELSS has the potential to deliver double-digit returns over the long term, while the safest options available under Section 80C mostly provide single-digit returns.
Note: In the last three years, the ELSS category provided 12.90% yields, 19.19% over the previous five years.