Did you switch to the new tax regime? In doing so, you would realise that unlike before, you do not need to keep investing to avail the tax benefits. You might have already invested in ELSS funds and would now wish to switch to non-elss funds. But, how does one go about it? This article will help you understand the same.
What is ELSS?
Equity-Linked Savings Scheme, also known as ELSS funds are tax-saving mutual funds that invest a majority of their corpus, at least 80% of their investible corpus in equities and equity-related securities. Just like any other Section 80C investments, ELSS mutual funds also qualify your tax deduction. An investor can save up to Rs 46,800 each year by investing in these ELSS tax saving mutual funds. However, a note of caution, these exemptions can be availed only under the old tax regime. If you have opted for the new tax regime under Budget 2020, you would have to forego most exemptions and deductions, including the Rs 1.5 lac limit u/s 80C. Owing to their tax deduction attributes, ELSS tax saving funds are believed to offer dual benefits of wealth creation and tax saving when invested for a longer duration.
Investments in ELSS funds are subject to a three years lock-in period. It also happens to be one of the shortest lock-in tenure as opposed to any other Section 80C investments. Public Provident Fund (PPF) and bank fixed deposits (FD) are Section 80C tax-saving investments with a lock-in period of 15 years and 5 years respectively. As the new tax regime foregoes the ELSS deduction, there could be a case that you don’t want to continue with your ELSS funds for tax saving in future, and instead switch to other non-ELSS funds for higher flexibility to access and redeem funds in times of dire need. For additional tax savings, you might consider investing in the government-sponsored National Pension Scheme (NPS) to avail the additional deduction of Rs fifty thousand under Section 80 CCD (1B), which is available under the old tax regime. Ideally, an asset allocation-based approach (mix of debt and equity) should be followed to construct an investment portfolio. This is because it is one of the vital determinants of the portfolio’s performance.
However, before you decide to withdraw your funds, investors should be wary that if they invest in ELSS via a systematic investment plan (SIP), their each SIP investment would have to complete three years before they could withdraw their funds. Investors often make this mistake while investing in ELSS funds via SIP. They think that they can entire investments as soon as the fund completes 3 years. Let’s understand this concept better with the help of an example. Let’s assume you start investing Rs 1500 each month in ABC fund from Jan 2017. In Jan 2020, only your first SIP investment in ABC fund would be eligible to withdraw. The second instalment would take one more month to be eligible to withdraw and the third instalment would take two more months and so on. Happy investing!
