The Budget 2018 re-introduced the Long Term Capital Gains (LTCG) tax on equity funds much to the disappointment of those heavily invested in Equity Linked Saving Schemes (ELSS). Many of the investors are plain confused about the bearing of this new inclusion and not sure if they are calculating their taxes right.
  1. Introduction
  2. ELSS still the best option for retail investors like you and me
  3. Wondering if you should shift to a Unit Linked Insurance Plan (ULIP)? Think again
  4. ELSS wins in flexibility
  5. Choose the option with taxable returns that perform better
  6. What does this mean for me?
  7. Higher the holding period, lesser is the blow of the LTCG tax
  8. Can I combine ELSS and PPF?

1. Introduction

The 10 percent LTCG tax was brought into effect from April 1, 2018. This means that there would be taxation on profits that exceed INR 1 lakh that is made from the sale of these schemes held for over a year. If you are worried that a substantial part of your future gains will go into paying taxes, you needn’t worry as much. ELSS despite the slap of LTCG is still, as per expert opinions, one of the biggest wealth generators in the MF category for retail investors.  We will tell you why ELSS despite the LTCG tax may still be the best tax saving option for you.

2. ELSS still the best option for retail investors like you and me

As a retail investor, ELSS is a great avenue to regularly invest small amounts amass a good return over time. By making use of the Section 80C for tax saving and having your investment locked in for three years not only creates wealth but also ensures you do not access your money during the tenure. The tenure of three years is not as binding as that of a Public Provident Fund or a Savings Deposit that require 15 and fives years’ commitment, respectively.  Under this Section, you may invest up to INR 1.5 lakh and reduce your taxable income amount. LTCG

3. Wondering if you should shift to a Unit Linked Insurance Plan (ULIP)? Think again

Other platforms of savings like the Public Provident Fund, the ULIPs seem more tax efficient as compared to the ELSS with the LTCG tax in motion now. The important point to note for the investors will be to not give up ELSS. ELSS has a higher potential than either to generate higher returns which makes them a good bet for long-term investment. Even with the LTCG, the post-tax returns from ELSS will be more lucrative than either PPF or ULIP.

4. ELSS wins in flexibility

For investors who like greater flexibility in their investments, ELSS fare better than ULIPs. Under ELSS you have the option to change your plans or shift to another fund if the scheme is not performing as per your expectation. This is not the case when investing in ULIPs. You can only shift to a different fund offered by the ULIP.

5. Choose the option with taxable returns that perform better

You must have noticed that post the LTCG announcement a lot of insurance companies have started rallying for insurance policies solely on the factor of tax-free returns. For a novice, this might seem appealing. But experts believe that it is a wiser decision to invest in products that have taxable returns but which also perform better than these low-return options. An insurance policy will never be able to match ELSS in terms of growth potential and that is one of the prime factors to consider when investing.

6. What does this mean for me?

The 10 percent tax is not a big punch if you make a mental adjustment. Say you invested and made a gain of 50 percent; this would mean that you need to pay 5 percent as LTCG on the original investment and if you make a profit of 100 percent then you pay 10 percent as your share of LTCG. So, even though the returns are getting trimmed under the new policy, the high return potential of ELSS can’t be overlooked, especially for long-term ELSS.

7. Higher the holding period, lesser is the blow of the LTCG tax

There is no denying that a 10 percent cut from your ELSS profits hurts but it should not deter you because this tax is on the gains you acquire. By increasing the holding period of your investment you can considerably lower the effect on the compound annual growth rate (CAGR), given other factors remain constant.

8. Can I combine ELSS and PPF?

This is actually a very good option to save taxes under Section 80C to combine PPF and ELSS. The combination works well with the ELSS doing its bit in garnering higher returns while the PPF serves as stabilizing your base. It is in fact recommended to have this as a combination rather than as an either-or option. You get three advantages by doing this.

a.  PFF allows you the safety of a government-backed investing option

b.  The portfolio has a well-allocated mix of equity and debt

c.  The growth potential of the portfolio is driven by the equity offering

If you have invested in ELSS or are planning to, there is no reason for you to panic or change your plans. ELSS is still one of the best performing options with a much higher promise of return than a savings deposit, PPF or a ULIP. Visit ClearTax to explore opportunities to invest in ELSS that have been handpicked by our experts.

Funds for every financial needs

Start Investing