Impact of the New Income Tax Regime on ELSS Investments

There has been a lot of conversation in the media about the impact of the new income tax regime will have on ELSS and other Tax Saving Investments . To answer the most common question, this blog can help you find out whether the new tax regime is beneficial to you.

The Budget 2020 was announced on 1st February. The Finance Minister Nirmala Sitharaman has proposed the new flat-rate which is lower than the existing income tax slabs by forgoing tax exemptions and deductions.

It was announced that income tax will be slashed for the individuals, for the companies' dividend tax has been abolished, aiming to boost the purchasing power and income. Under the proposed IT slab, for the annual income up to 2.5 lakh rupees is exempt from tax; those earning between 2.5 lakh to 5 lakh will pay 5% tax; those earning between 5 lakh to 7.5 lakh will pay 10%, so on with 30% percent on income above 15 lakh rupees.

The Budget 2020's new Tax slabs have made many investors wary regarding their investments and savings. But the experts believe that the new income tax structure has many benefits for the tax-saving investors, albeit one must invest cautiously. If one opts to choose the new tax regime for its attractive rates then, one must be ready to bid goodbye to 70 out of 100 exemptions that were available in the previous regime. It has been explained that the exclusion of these 70 exemptions is to help contain income tax frauds. In the past, there has been a case where individuals would inflate their return filing for claiming more tax refunds. Therefore, now with less exemption, the chances of misusing the exemptions have also reduced.

ELSS (Equity-Linked Saving Schemes) funds are Tax Saving Mutual Funds, investing primarily inequity and equity-related securities of corporate. It has a statutory lock-in period of 3 years. They enable investors to avail deduction from total income, as permitted under the Income Tax Act 1961 under Section 80C. For a long time, ELSS Schemes are favored by young investors, for its tax saving nature and capability to yield good returns.

With the new the regime, many investors feel that it might impact their ELSS adversely. But investment advisors believe that if one has an existing plan in place, stick to it. It is not advisable to make changes in the last minute; especially the investors who have their SIPs going on in the ELSS shouldn't worry too much. ELSS are essentially are multi-cap funds. These schemes can help investors create a corpus for a long term goal. With the lock-in period only 3 years, the investors don't have to make hasty decisions. It is better to tag it to a long term goal and continue to invest to achieve one's goals. According to some wealth management organizations, many young investors are keen to continue in the old regime as it helps in creating savings for them, thus the ELSS flow is not going to be affected. Therefore, ELSS Schemes will remain attractive to lower-income groups as the taxable income reduces considerably after the deduction of Rs. 1.5 lakh.

Experts have also suggested that the newly-introduced Tax slab allows investors to choose the right investment tool as per their financial plan, and there is no obligation to invest in the ELSS fund to save taxes. Under the new tax slab, you can select the appropriate Mutual fund scheme in sync with your financial goals, risk appetite, and return expectations.

On the first the study, the new personal income tax slabs could be negative for ELSS and other tax saving options such as PPF, NPS, and insurance, especially to investors who like the convenience and simplified tax filing process. Yet, if the Mutual funds advisors can highlight the advantages of ELSS, such as the potential to create wealth in the long term with the flexibility of a multi-cap fund, then investors could still, find ELSS as an attractive option.

Furthermore, the new tax regime, which has a lower tax slab than the prevailing one is not suitable for everyone. Investors who avail deductions and exemptions under insurance schemes invest in ELSS, LTA (Leave Travel Allowance), HRA (Housing Rent Allowance), interest on housing loan on the self-occupied property, the standard deduction can save more in the existing tax regime. These investors are better off not migrating to the new regime. On the other hand, the new tax regime is appropriate for investors who cannot save enough to invest and want to have more money at their disposal.

Although the comparison between the old and the new regime will continue, it does prove to some extent that the investors will save more tax under the existing regime as compared to the latest regime because of the various deductions and exemptions under the Income Tax Act.

So to conclude, the combination of some options seems to be the way to go. For example, the combination of ELSS and PPF can prove to be an excellent option under Section 80C. The ELSS can garner higher returns while PPF serves by stabilizing. Also, being a government-backed investing option PPF provides safety. This combination has a well-allocated mix of equity and debt. So as the advisors suggest ELSS is still the best performing Tax Saving Schemes with much higher potential of providing better returns.