ELSS now has LTCG. Is it still the best tax-saving option?

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), stocks and equity funds. Many of the investors are looking at how this new rule impacts their equity investments. However, ELSS still remains a favourite of many investors as it offers the twin benefits of tax saving and wealth creation.

Introduction

Effective from 01 April 2018, the long-term capital gains exceeding Rs 1 lakh a year on equity-oriented funds is taxable at the rate of 10%, with no indexation benefit. This means the ELSS investors should now account for LTCG tax before redeeming their investments. If you are worried that a substantial part of your future gains will go into paying taxes, you need not worry. ELSS, despite the burden of tax on LTCG, is still one of the best wealth accumulators in the long run.

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

For retail investors (individual investors), ELSS is an excellent investment avenue to save taxes and also has the potential to offer inflation-beating returns over time. ELSS is a tax saving mutual fund that qualifies for the Section 80C tax deduction up to Rs 1.5 lakh per annum under the Income Tax Act, 1961. It has a lock-in period of just three years which is the shortest among all Section 80C options. Furthermore, ELSS has the potential to offer the highest returns among tax-saving investments over time. You may consider investing in ELSS through the systematic investment plan or SIP. It helps you invest fixed amounts of money regularly in the ELSS. You may invest as low as Rs 500 per instalment in the ELSS through the SIP. 

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

Unit-linked insurance plan or ULIP offers the twin benefits of life insurance and investment. It has a lock-in period of five years. However, ULIPs have a low mortality cover and you are better off availing a term life insurance plan which is a pure life insurance policy. Moreover, ULIPs have higher charges in the initial years which are deducted from the premiums of the plan. 

You must never mix insurance with investment. It helps if you invest in ELSS to save tax and for inflation-beating returns provided it matches your risk profile. You may consider a term life insurance plan that offers a higher mortality cover for life insurance needs.

ELSS Wins in Flexibility

For investors who prefer greater flexibility in their investments, ELSS are a better option 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 from one fund to another within the same unit linked insurance plan. For instance, you may change from an equity fund to a debt fund or vice versa under the same plan. Moreover, ELSS has a lower lock-in period of three years as compared to five years for the ULIP.

Choose the Option With Taxable Returns That Perform Better

You must have noticed that post the LTCG tax announcement on equity-oriented funds, a lot of insurance companies pitched life insurance policies as a suitable alternative because of the tax-free returns. However, you must choose an investment to attain financial goals only if it matches your risk profile. It helps if you don’t mix insurance with investment. 

If you are an aggressive investor you could invest in ELSS for tax saving and inflation-beating returns despite the tax on long term capital gains. You must avail of a life insurance plan for mortality cover and not for returns. Moreover, the returns you get from life insurance plans such as ULIP may be lower as compared to ELSS despite the tax free benefit. 

What Does This Mean for Me?

You may continue with ELSS investments to attain your investment objectives if it matches your risk tolerance. It remains one of the best investments offering the twin benefits of tax saving and inflation-beating returns. Moreover, it has the shortest lock-in period among all tax saving investments under Section 80C. It helps if you invest in ELSS through the SIP where you may invest as low as Rs 500 per instalment.

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

You may continue with ELSS investments even beyond the three year lock-in period as it helps you attain your long term financial goals. It helps as ELSS has the potential to offer double digit returns over the long run coupled with the benefit of tax saving. 

ELSS is an excellent tax-saving investment if you are in the higher income tax brackets as it helps you save up to Rs 46,800 per annum in taxes. Moreover, ELSS invests predominantly in stocks and is one of the only equity-oriented investments that enjoys the Section 80C tax benefits up to Rs 1.5 lakh per annum. 

You may invest in ELSS for the long run as it is a good tax-saving investment. It helps as ELSS is a good investment first and a tax-saver later which is one of the main characteristics of a good tax-saving plan. It remains an excellent investment for the long-term despite the 10% LTCG tax on gains above Rs 1 lakh per annum. 

Can I Combine ELSS and PPF?

You may consider investing in the combination of PPF and ELSS to save taxes under Section 80C. The combination works well as ELSS may offer double digit returns over time and PPF offers one of the highest returns among fixed income investments. 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

ELSS is still one of the best tax saving options with a higher potential of offering returns than a fixed deposit, PPF or a ULIP. You may invest in expert-curated mutual fund plans consisting of top-performing ELSS by downloading the BLACK by ClearTax app.