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Business News/ Money / Personal Finance/  How new tax regime may impact ELSS fund investors?

How new tax regime may impact ELSS fund investors?

But according to experts, these changes would make investing in ELSS to reduce taxes less appealing for people with taxable income up to ₹7 lacs, let’s know how.

Smt. Nirmala Sitharaman, Union Finance Minister, announced various reforms to the new tax regime in her address introducing the Budget 2023. (istockphoto)Premium
Smt. Nirmala Sitharaman, Union Finance Minister, announced various reforms to the new tax regime in her address introducing the Budget 2023. (istockphoto)

Union Finance Minister Nirmala Sitharaman has announced various reforms to the new tax regime in her address while introducing the Budget 2023-23. FM increased the personal income tax rebate threshold under the new tax regime from 5 lakh lakh to 7 lakh, lowered the number of tax slabs from six to five, and increased the tax exemption ceiling to 3 lakh. The highest surcharge rate was lowered from 37% to 25%, a standard deduction of 50,000 was introduced for retirees and salaried individuals, and a family pension exemption of 15,000 was implemented. But according to experts, these changes would make investing in ELSS to reduce taxes less appealing for people with taxable income up to 7 lacs, let’s know-how.

Ashish Patil, Head - Product & Strategy LIC Mutual Fund Asset Management Ltd said “The average yearly gross sales in the ELSS category were 25,000 crore in the past 5 years. The tax benefit was given either on expenses like HRA, home loan interest payments or on investments like ELSS, PPF, NPS etc. The tax deductions/ exemptions in the old tax regime need to be a minimum of 2 lakh for an individual having an income of 7 lakh, which rises gradually to R 4.25 lakh for an income of 15.5 lakh and above for breakeven with the new tax regime. If an individual has an income of 10 lakhs and total tax deductions of 3 lakhs then his tax outgo will be the same in the old and new tax regimes."

“Hence, he will choose the old tax regime over the new one only when he has a minimum tax deduction of 3 lakhs as it will lead to less tax outgo. For an individual income of 15.5 lakhs or above, the total tax deductions need to be 4.25 lakhs for the breakeven. Even after the deduction, the benefits the individual can get may be insignificant. Hence, we may see a decrease in the gross sales in the ELSS category from next year. However, investors need to change the way they look at ELSS as a wealth creation tool rather than a mere tax saving option. Saving is an essential aspect of wealth creation. During the high volatility periods, ELSS ensures the discipline of staying put for the investment horizon, ensuring the investor reaps the benefits of long-term investment because of the 3-year lock-in," added Ashish Patil.

Suresh Surana, Founder, RSM India said “The Budget 2023 proposed to make the new tax regime as the default tax regime which would apply to all the individual taxpayers unless such taxpayer opts for the old tax regime by way of following the prescribed procedure (which is yet to be notified). It is pertinent to note that the new tax regime u/s 115BAC provides a restriction on claiming certain deductions and exemptions including deduction u/s 80C for investment in Equity Linked Savings Scheme (ELSS)."

“Thus, ELSS investment is only available as a deduction u/s 80C of the IT Act subject to a 3 year lock-in period under the old tax regime. Accordingly, the ELSS fund investors would be required to evaluate the option of the old tax regime if they intend to claim deduction with respect to the ELSS investment. Further, the taxpayers whose income is within Rs. 750,000 and who opt for the new tax regime, may not be keen to make investment in ELSS funds," Suresh Surana added.

CA Manish P. Hingar. Founder at Fintoo said “Under the old tax regime, Equity-Linked Saving Scheme (ELSS) investments are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. This means that the investment made in ELSS funds could be used to reduce an individual's taxable income. However, in Budget 2021, the new tax regime has done away with many of the exemptions and deductions that were previously available, including Section 80C which includes ELSS investment. Also, in the recent budget 2023, many changes were announced to make the new tax regime attractive. As a result, taxpayers with taxable income up to 7 lacs will have less incentive to invest in ELSS to save their taxes. They would rather opt for the new tax regime and enjoy the tax benefits."

“Having said that, individuals in higher tax brackets will not have any impact of the new tax regime rules as they will still be using the old tax regime owing to its added tax benefits in terms of available deductions and exemptions and thus they will still continue to invest in ELSS funds to claim 80C deduction. Further, It's important for ELSS fund investors to consider their overall financial situation, tax liabilities, and investment goals before making a decision on their investments," CA Manish P. Hingar further added.

Deepashree Shetty, Associate Partner - Tax and Regulatory Services, BDO India said “The following returns from ELSS funds are taxable under both tax regimes Old and New: Dividend as “Income from Other Sources" as per applicable slab rates; and Redemption proceeds as Long Term Capital Gain @ 10% tax. Contributions made to ELSS funds are eligible for a deduction up to INR 1,50,000 per year under Section 80C of the Income-tax Act; thereby, eligible for tax-savings up to INR 46,800 during a year (assuming 30% tax and 4% cess on the deductible amount of INR 150,000)."

 “However, a taxpayer opting for the New Tax Regime cannot claim the deduction under Section 80C and hence, the tax benefit for ELSS contributions need to be foregone. This could be a differentiating factor as ELSS generally have a 3-year lock-in period. So, the tax-benefit for contributions made during the lock-in period stands lost for a taxpayer opting for the New Tax Regime. ELSS fund investors may want to still opt for the Old Tax Regime to save taxes," Deepashree Shetty further added.

Kaustubh Belapurkar, Director – Manager Research, Morningstar India said “We don’t see any major impact. ELSS funds continue to remain great investment options for investors looking to take diversified equity exposure. Tax benefits should always be secondary, the primary factor that investors should consider is the suitability of an investment for their risk return objectives."

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.


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Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 08 Feb 2023, 04:01 PM IST
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