ELSS investments: Evolving tax-saving strategies, what lies ahead?

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New Delhi: Investments in equity schemes of mutual funds have reached record highs. Investors are pouring money into the stock market to capitalize on its rapid growth. However, the Equity Linked Savings Scheme (ELSS), which has long been popular among taxpayers, is losing its luster. Following the introduction of new tax regulations, investments in ELSS have seen a continuous decline. This is happening over the past three months, with noticeable net outflows from these funds.

ELSS are equity mutual funds that invest a minimum of 80% of their assets in equities and related products. This investment comes with a lock-in period of three years. Compared to other tax-saving options under Section 80C, ELSS offers better liquidity. It allows investors the freedom to withdraw their funds when needed. Under the previous tax regime, investments up to INR 1.5 lakh in ELSS were eligible for tax deductions, but this provision is absent in the new regime.

According the Association of Mutual Funds in India (AMFI)..

Net outflows from ELSS doubled to INR 445 crore in May 2024. In April, tax-saving mutual funds witnessed net outflows of INR 144 crore. With investments in ELSS for the fiscal year 2024 totaled INR 1041 crore. It reflected 87% decrease compared to the previous year’s INR 7744 crore. Quarterly data shows a consistent decline in ELSS investments. All with INR 918 crore invested in June, down from INR 1694 crore in the same quarter last year.

Investors tend to make significant investments in the final quarter of the fiscal year for tax savings, hence the higher figures in March. In contrast, only INR 57 crore was invested in these funds in the December quarter. If this trend continues, ELSS could soon become a thing of the past.

Jitendra Solanki, a registered investment advisor with SEBI, suggests that there are now more options available for tax savings, such as NPS, PPF, school fees for two children, life insurance premiums, and home loan EMIs under Section 80C. With increased salaries, contributions to Provident Funds (PF) have also risen, diverting investments away from ELSS for tax savings. To prevent ELSS from fading away, the government should consider removing it from Section 80C. Providing separate tax incentives for tax-saving investments would attract more funds into ELSS, benefiting both taxpayers and the stock market’s growth prospects.

Rajesh Bansal, MD of Midas Finserve, advocates for increasing the investment limit under Section 80C, which has remained unchanged at INR 1.5 lakh for the past decade. Enhancing the savings culture and promoting equity participation among the general public would require introducing separate tax relief provisions for investments in ELSS under the new tax regime. This move is expected to boost savings among the youth, providing a boost to the economy as a whole.