KEEP THE ELSS EDGE

Why equity-linked savings schemes remain a good bet in the LTCG tax era

Long-term Capital Gains (LTCG) tax on equity made a comeback after almost 14 years in 2018. Now, equity fund investors will have to pay 10 per cent LTCG tax on gains over Rs 1 lakh in a financial year. This means that the gains made from investments in ELSS (equity-linked savings schemes) will attract LTCG tax at redemption if the net gain is over Rs 1 lakh in a financial year.

ELSS is a diversified equity mutual fund product that qualifies as a taxsaving instrument under Section 80C of the Income Tax Act. The tax exemption is limited to an investment of Rs 1.5 lakh. Taxation on your equity investment doesn’t mean it has lost its charm. “Even with LTCG tax, equity remains attractive from a taxation standpoint,” says Radhika Gupta, CEO, Edelweiss Mutual Fund. “Investors should continue looking at equity as an asset class for the long term.”

Here’s how LTCG tax will work. If you invest Rs 1.5 lakh in ELSS on, say, January 5, 2019, and your investment grows to Rs 3 lakh on January 6, 2022, you have made a gain of Rs 1.5 lakh. If you redeem your entire investment, the gains above Rs 1 lakh will attract LTCG tax of 10 per cent—Rs 5,000. So your net gain will be Rs 1.45 lakh. Despite this, ELSS scores on many fronts.

THE EQUITY ADVANTAGE

Equity can provide higher returns with an acceptable level of risk. The challenge lies in understanding the behaviour of markets over the long term. Returns over 10 to 15 years have been very attractive. Ditto for ELSS. In the past five years, the average return from the top 10 ELSS stands at 19.03 per cent. If you are investing for your long-term financial goals, equity is a must-have in your portfolio. And ELSS could be a good starting point for the newbies in equity investing. SIP’s the way: Being a mutual fund scheme, ELSS allows you to invest by way of SIP (systematic investment plan). This helps limit the exposure to market volatility. When the markets are down, the investor ends up buying higher number of units for the same SIP amount, cutting the losses in the long run when the markets rebound.

Shorter lock-in period: ELSS mutual funds are open-ended schemes having a mandatory lock-in period of three years from the date of investment. Investors not comfortable with this feature should know that the lock-in is of a much lesser period than other tax-saving instruments. It is six years and 15 years in the case of NSC (National Savings Certificate) and PPF (Public Provident Fund) respectively.

Liquidity: ELSS allows you to choose between the dividend and growth options, as per your liquidity requirements. The growth option ensures compounding and capital appreciation. In case of ELSS, the dividend payout option provides some liquidity even during the lock-in period. The dividend can be invested in other investments—equity or debt— depending upon the rebalancing needs in a portfolio.

Invest with small amount: One can buy units of a minimum amount of Rs 500 and in multiples of Rs 500 thereafter. There is no maximum investment cap in these plans, but the tax advantage is only up to Rs 1.5 lakh. There has been a change in the tax laws, but not in the characteristics of ELSS. So if you are investing for a long-term financial goal and are ready to take some volatility in your stride, ELSS remains a good bet like before.