A concerted effort must be made to raise the Section 80C tax deduction caps in fiscal year 2023. If retail investors could save more taxes, that would be advantageous. According to a research study of ELSS or tax-savings fund inflows, these funds saw an increase in inflows when Section 80C tax deduction limits were last increased to Rs 1.5 lakh.
Approximately 28% of all equity-linked savings scheme (ELSS) investments made between the financial years 2005 and 2014 took place in March alone. Since FY2014, the tendency has improved, with these investments occurring in the latter three months of the fiscal year.
The industry of mutual funds (MF) is not exempt from procrastination; it occurs there as well. As the fiscal year comes to a conclusion in March each year, there is a rush to invest in tax-saving funds. It’s interesting to note that 50% of ELSS investments take place in the most recent quarter. We are currently in the fourth quarter, so it is helpful to review some ELSS fundamentals, often known as tax-saving mutual fund schemes.
Making use of ELSS
NIndia has historically had a savings-based economy. This is supported by the trend in savings over the years as well as how Indian investors view investments, particularly those that come with tax breaks.
The assets under management (AUM) of the ELSS category amount more than Rs 1.50 lakh crore, or around 4% of the AUM of the entire mutual fund sector. As of October 31, 2022, the industry had 40 ELSS and 1.44 crore customers.
Indian ELSS investing trend
ELSS funds provided tax deductions of up to Rs 10,000 until FY2005. Under section 80C of the Finance Act of 2005, it was raised to Rs. 1 lakh in 2005 and then to Rs. 1.5 lakh in FY15.
When the limit under 80C was increased to Rs 1.5 lakh in FY2015, as indicated in the table, there was an abrupt increase in ELSS gross sales:
The flows climbed to Rs 25,000 crore per year from Rs 3,000 crore per year (a 5-year average during FY10–14) (the 5-year average during FY18-22). If the 80C restrictions are raised further, we might see additional flows in ELSS.
Investment options without a market component lack volatility. Therefore, spending any time on them won’t have much of an impact.
However, unlike the National Savings Certificate (NSC), Public Provident Fund (PPF), old pension plan, or any other fixed yield debt-oriented savings tool, ELSS is an equity-based savings instrument linked to the market.
Therefore, investors can reduce volatility through rupee cost averaging and investing in funds throughout several market cycles by investing in ELSS consistently throughout the financial year as opposed to rushing to invest in March or the January–March quarter.
SIP can be performed every day, every week, every month, every quarter, or every two years. A wonderful solution is regular investment. Instead of making a one-time investment in ELSS funds, salaried investors will benefit from being able to more evenly distribute their monthly income.
Decoding ELSS
In addition to being a fantastic tax-saving investment, ELSS has a minimum lock-in time of 3 years, whereas other tax-saving choices have a lock-in period of 5 or more years.
Additionally, ELSS gains are only partially taxed (long-term capital gains on equity or equity mutual funds up to Rs 1 lakh is tax-free). Earnings on other 80C investment choices, such as tax-saving FDs and NSCs, are fully taxable, but gains on NPS are only partially taxable.
In conclusion, investors should reconsider their approach to investing or consider ELSS as a possible investment. Periodic systematic investing in an ELSS throughout time—10 years or more—is advantageous and should not be restricted to tax season, whether that is the January–March quarter or the month of March.
