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ELSS investments require a long-term commitment of at least seven years.
About three-fourth of taxpayers filed their income-tax returns for 2023-2024 under the new regime.
Finance Minister Nirmala Sitharaman's decision in Budget 2025 to increase the tax-free income threshold to Rs 12 lakh (Rs 12.75 lakh for salaried taxpayers) under the new regime is expected to drive more individuals away from the old regime.
While this may reduce the demand for tax-saving instruments like Equity Linked Savings Schemes (ELSS), these funds remain an attractive option for the minority sticking with the old regime.
Consult a tax professional to determine which regime is beneficial for you after this year's Budget changes.
If the old regime still works, calculate the tax-saving contributions you already make.
"Assess your EPF (Employees' Provident Fund) contributions, insurance premiums, and other deductions. Invest in ELSS only if you fall short of the Rs 1.5 lakh limit under Section 80C," says Rajani Tandale, senior vice-president of mutual funds, 1 Finance.
Short lock-in
ELSS offers the shortest lock-in period among tax-saving products.
"The lock-in is only for three years, compared to five years for tax-saving fixed deposits and 15 years for PPF (Public Provident Fund)," says Tandale.
Over the long term, ELSS funds have historically outperformed fixed-income options.
"Returns typically range from 10 to 15 per cent compounded annually," says Mohit Gang, co-founder and chief executive officer, Moneyfront.
The lock-in also encourages discipline.
"Staying invested in volatile times, due to the lock-in, benefits investors over the long run," says Abhishek Tiwari, executive director and chief business officer, PGIM India Mutual Fund.
Investing through a systematic investment plan (SIP) helps to average out the cost of investment.
"A portfolio of stocks diversified across sectors and market caps mitigates the risk associated with individual stocks," says Raghvendra Nath, managing director, Ladderup Wealth Management.
Be ready for volatility
Equity exposure makes ELSS susceptible to market volatility.
"The exposure to equities can lead to significant fluctuations in the value of investments in the short term. Investors may even experience negative returns during market downturns," says Nath.
The degree of volatility varies by fund composition.
"Some funds have higher exposure to midcap and smallcap stocks, which can be highly volatile," says Tandale.
SIP investors cannot withdraw their entire investment after three years.
"Each SIP instalment is separately locked for three years, a detail many investors overlook," says Tandale.
Are they for you?
Investors should be able to stomach volatility to invest in ELSS.
"Those with moderate to high risk tolerance may find ELSS appealing," says Nath.
ELSS will no longer be attractive for those planning to switch to the new tax regime.
"Other equity mutual funds, where they would enjoy greater flexibility, will be more attractive," says Gang.
Highly risk-averse investors in the old tax regime may also steer clear of ELSS.
Dos and don'ts
ELSS investments require a long-term commitment of at least seven years.
Those moving from the old to the new tax regime this year should stop SIP contributions.
Once the lock-in ends, investors are allowed to exit ELSS.
Stay invested if the fund is doing well, otherwise exit.
Redemptions should be staggered to minimise tax impact.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
