The Union Budget 2018-19 brought back the tax on Long-Term Capital Gains (LTCG) earned on equity holdings, much to the disappointment of those heavily invested in Equity Linked Saving Schemes (ELSS). Many of the investors are now not sure as to the bearing of this new inclusion is worth it. We have covered the following in this article:

1. Introduction

Effective from 1 April 2018, the long-term capital gains exceeding Rs 1 lakh a year is taxable at the rate of 10%, and there is no indexation. This means the ELSS investors should now account LTCG tax before redeeming their investment. If you are worried that a substantial part of your future gains will go into paying taxes, you need not worry as much. ELSS, despite the burden of tax on LTCG, is still the most beneficial wealth accumulator in the tax-saving category for taxpayers.

2. ELSS Still the Best Option for Retail Investors like You and Me

For retail investors, ELSS is an excellent avenue to regularly invest small amounts in amassing an attractive return over a long period. ELSS is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. It has a lock-in period of just three years, the shortest among all Section 80C options. Furthermore, ELSS has the potential to offer the highest returns among tax-saving investments. The lock-in tenure of three years is not as binding as that of a Public Provident Fund or a Savings Deposit that require 5 and 15 years’ commitment, respectively.

3. Wondering If You Should Shift to a Unit Linked Insurance Plan (ULIP)? Think Again

Other popular tax-saving options are Public Provident Fund (PPF) and ULIPs. The critical point to note for the investors will be not to give up ELSS. ELSS has a higher potential than PPF, ULIPs or any other tax-saving option to generate higher returns, which makes them a good bet for long-term investment. Even with the tax on 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 can change your plan or shift to a different fund if you are not happy with the current one. This is not the case when investing in ULIPs. You can only change 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 tax announcement, a lot of insurance companies have started rallying for insurance policies solely on the factor of tax-free returns. For a novice investor, this might seem appealing. But experts say that it is a wise decision to invest in products that have taxable gains but also perform way better than low-return investment options. An insurance policy will never be able to match ELSS in terms of growth potential, and that is one of the prime factors that you should consider when investing.

6. What Does This Mean for Me?

The 10% tax on LTCG exceeding Rs 1 lakh a year is not a big pinch if you make a mental adjustment. So, even though the returns are getting trimmed under the new tax policy, the high return potential of ELSS cannot be ignored, especially for long-term investments in ELSS.

7. Higher the Holding Period, Lesser Is the Blow of the LTCG Tax

There is no denying that a 10% cut from your ELSS profits hurts but it should not deter you because this tax is on the gains you acquire, and is applicable only when it exceeds Rs 1 lakh a year. 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 an excellent 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 by stabilising your base. It is advisable to have this combination rather than as an either-or option. You get three advantages by doing this.

  • PFF allows you the safety of a government-backed investing option
  • The portfolio has a well-allocated mix of equity and debt
  • The equity offering drives the growth potential of the portfolio

If you have invested in ELSS or are planning, there is no reason to panic or change plans. ELSS is still the best performing tax saving option with a much higher potential of providing better returns than a savings deposit, PPF or a ULIP. Visit ClearTax to explore opportunities to invest in ELSS that are handpicked by our experts.

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