Impact of New Tax Regime on ELSS Mutual Funds: A Guide for Investors
The announcement of the new tax regime in Budget 2020-21 has raised questions about the future of ELSS (Equity Linked Savings Scheme) mutual funds, which have long been popular tax-saving instruments for Indian investors. Understanding how this new tax regime affects ELSS investments is crucial for investors looking to make informed decisions about their finances. This article delves into the changes and the implications for ELSS mutual funds.
Understanding ELSS Mutual Funds and Their Role
ELSS mutual funds have long been favored for tax-saving purposes, particularly under Section 80C of the Indian Income Tax Act. One of the key benefits of ELSS investments is the exemption of up to Rs. 1.5 lakh in a financial year. These funds serve dual purposes for investors: tax saving and wealth creation. Furthermore, ELSS investments have a shorter lock-in period (three years) compared to other tax-saving instruments, such as Public Provident Fund (PPF) and National Savings Certificates (NSC), which typically have longer lock-in periods.
Overview of the New Tax Regime
The new tax regime introduced in Budget 2020-21 offers taxpayers the option to simplify their tax obligations by eliminating certain deductions and exemptions, such as those under Section 80C. Below are the key changes and their implications:
Tax Slab for Different Income Ranges
For individuals earning between Rs 5 lakh and Rs 7.5 lakh, the tax rate will be reduced to 10% from the current 20%. Those earning between Rs 7.5 lakh and Rs 10 lakh will pay 15% instead of the current 20%. Individuals with an income between Rs 10 lakh and Rs 12.5 lakh who opt for the new tax regime will pay 20% instead of the current 30%. For individuals with an income ranging from Rs 12.5 lakh to Rs 15 lakh, the tax rate will be 25%, down from the current 30%. The tax rate for those earning more than Rs 15 lakh remains unchanged at 30%.Eligibility and Benefits of the New Regime
Under the new tax regime, taxpayers with incomes in the range of Rs 5 lakh to Rs 15 lakh will find the tax rates more favorable. However, the new tax regime is not suitable for everyone. Investors who already avail of deductions and exemptions, such as differences in income tax regimes, insurance schemes, and deductions under Sections 80C, 80D, etc., may benefit more from the current tax regime. These investors can continue to save more through existing tax breaks and may not have a strong incentive to switch.
Future of ELSS Mutual Funds
The future of ELSS mutual funds in the new tax regime looks promising. Despite the reduced tax benefits offered by the new tax slab, ELSS funds will continue to be a popular choice for many investors. Here’s why:
Investor Behavior and Habits
According to surveys, a substantial portion of taxpayers, approximately 90%, are likely to stick with the old tax regime to continue enjoying the benefits of Section 80C. This means that ELSS funds will maintain their popularity among investors who prioritize tax savings. The new tax regime may be more appealing to those who do not require deductions and exemptions and want to simplify their tax planning.
Perspectives from Industry Experts
Financial experts predict that the majority of individuals will continue to use the old tax regime for the coming year. They believe that investors will avoid the complications and potential risks associated with the new tax regime and opt for the simpler and more familiar method of tax saving. Consequently, ELSS mutual funds will continue to be a viable investment option for tax-savvy investors.
Conclusion
The implementation of the new tax regime in Budget 2020-21 introduces changes that affect the suitability of various tax-saving instruments, including ELSS mutual funds. While the new tax slab is advantageous for certain income groups, it may not suit every investor. However, given the current framework and the behavior of the majority of taxpayers, it is clear that ELSS funds will continue to be a popular choice for investors seeking both tax savings and wealth creation.
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