The new tax regime proposed in the Union Budget 2020 allows taxpayers to lower their taxes. Consequently, the appeal for tax-saving instruments such as the Equity Linked Savings Scheme (ELSS) might fade away.
The Union Budget 2020 proposed that taxpayers would be allowed to switch to a new tax regime that would help individuals lower tax payments. However, taxpayers who opt for the new tax regime would not be able to avail the tax benefits and exemptions offered when investing in tax-saving instruments.
According to the mutual fund industry experts, the in-demand tax-saving ELSS products could lose their popularity as taxpayers might stay away from investing and switch to the new tax regime to receive a higher post-tax income.
The new regime could result in investors at the lower end of the tax slab spectrum to do away with their investments to save more on taxes.
Under Section 80C of the Income Tax Act, investors are eligible to claim up to Rs.1.5 lakh on investments in tax-saving instruments such as the ELSS, Public Provident Fund, and Unit Linked Insurance Plans (ULIPs) among others.
The Equity Linked Savings Schemes (ELSS) have witnessed a significant inflow of investors in recent years. The lowest lock-in period of 3 years on ELSS when compared to other tax savings products such as ULIPs and PPFs which have a lock-in period of five and fifteen years respectively make them one of the most preferred tax-saving instruments among investors.
Also, ELSS allows investors to contribute their investments every month through a Systematic Investment Plan (SIP). According to reports, the market has witnessed the Assets Under Management (AUM) of ELSS surging significantly in the previous three years. While the AUM of ELSS in December 2017 stood at Rs.80,891 crore, the next two years witnessed a significant rise in AUMs with December 2018 and December 2019 recording Rs.88,512 crore and Rs.99,817 crore respectively.
ELSS has turned out to be one of the most opted tax-saving products among millennials as compared to the other conventional products such as tax-saving FDs, PPF, and National Savings Certificate (NSC). This is mainly due to the dual benefit that the ELSS offers to investors. Not only does ELSS help investors in tax saving but also with the accumulation of wealth, considering the high returns it offers at the end of the lock-in period.
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