What will happen to ELSS after new Direct Tax Code (DTC) ?

By
Hemant Beniwal
36

Good things do not last long… is an old saying. I think same is happening with the ELSS category of Equity Diversified Mutual Fund.

Last week I wrote “Simple Tax Planning Guide and ABC of Section 80 C” – where I have not missed a chance to write that ELSS (Equity Linked Saving Schemes) of Mutual Fund is undoubtedly is the best tax saving instrument. But again the same question echoed by readers – What will happen to ELSS after new Direct Tax Code (DTC)?

Read – PPF Vs ELSS

In last 1 year I have received 30-40 comments where readers have raised this concern. Some recent comments are:

What will happen to ELSS after new Direct Tax Code (DTC) ?
Comment 1. After DTC comes into effect, probably by 2012 what will happen to my ELSS investment done this year? If I pay Canara Robecco equal installments (SIP) for next 5-6 months… what’s the future? Will there be a lock in after DTC also? Will the fund (ELSS) perform as well as it is performing now? What’s the future of ELSS post DTC?

Comment 2. What’s the best alternative of ELSS for next year when the proposed DTC kicks in? Right now I’m utilizing 100% 80C through ELSS but confused if there’s any such scheme will remain available post DTC except crappy ULIPS etc. any thought? I don’t want to dive into debt except mandatory EPF deductions through my employer.

Comment 3. Could you please tell me that if I invest 10000 this year in ELSS and lock for say 5 years from this year (2011), then should I pay 10000 every year till the fifth year? So for this year investment, I can get a tax exemption. But consecutive years what would be the case and how should I go about?

Check – When not to invest in Equity Linked Saving Schemes (ELSS)

So now there are lots of questions in these comments – let’s answer one by one:

Q1. Will there be tax benefit on ELSS after DTC?

According to last DRAFT of DTC, ELSS will not be counted as tax saving instrument. Here important word is DRAFT – so you never know final draft can give a positive surprise. Mutual Fund industry is trying hard that ELSS should be included in Section 66 (replacement of section 80C in DTC) so keep your fingers crossed.

What will happen to ELSS after new Direct Tax Code (DTC) ? Click to Tweet

Q2. When will DTC come into effect?

There is a high probability that it will not be introduced in April 2012. But this is also true that UPA govt. would like to bring this new code before parliament election so April 2013 should be a better guess.

Q3. After DTC comes into effect, what will happen to my ELSS investment done this year?

If you make investments in ELSS this year, you can claim this as deduction under section 80C. As ELSS is a onetime investment & you don’t need to make any regular payments like ULIP or PPF. I don’t know why people are worried.

Q4. Will there be a lock in after DTC implementation also?

Yes, you need to keep your funds locked in for coming 3 years.

Q5. What’s the future of ELSS post DTC?

If ELSS can’t get a chance to be a tax saving instruments – either these funds will be made open ended or will be merged with other funds. The decision lies with the individual fund houses.

Q6. What’s the best alternative of ELSS for next year when the proposed DTC kicks in?

If I talk about current available products NPS (New Pension Scheme) looks a better alternative. And it looks NPS is the biggest reason why ELSS is not part of DTC Draft. 🙁

Q7. Could you please tell me that if I invest 10000 this year in ELSS and lock for say 5 years from this year (2011), then should I pay 10000 every year till the fifth year?

First of all ELSS is having 3 years of locking period, secondly there is no compulsion of regular payments.

Bonus Question. Is it a good time to invest in ELSS fund?

Hey no one asked this! So what – I know most of you are having this question in your mind. I think this is a good time to invest in ELSS or any other diversified equity fund ‘IF’ your investment horizon is 5-7 years or your overall exposure to equity is low.

Go ahead and pick the last ripe fruit.

Previous articleABC of section 80C
Next articleWhich is the best ELSS Mutual Fund for 2012?
Hemant Beniwal
Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

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36 COMMENTS

  1. Hi Hemant,

    Nice explanation.

    You have raised doubts which are still hovering investors mind.Infact at one of the workshop recently, i happen to meet HR person.He raised a query-ELSS is better or PPF? Now i was amazed to see teh comparison as these are apple and oranges.The only similarity is tax benefit.However, he wanted to hear from me that ELSS is a bad investment.Probably, he has some investment which were not doing well.

    The main reason for these queries, i believe, is investing in ELSS only for tax benefit and not understanding the equity environment.At the end of he tunnel, it i s still an equity exposure where markets can play with you in short term.However, most of us are investing with an objective to redeem after three years, any how.And when markets are not in favor like now, the same investment goes in the BAD BOOKS.I suppose this one should be looked at more than 3 years horizon during investment.

    • Hi Jitendra,
      In your point there are 2 important things related to investor behaviour:
      First is Confirmation Bias – that guy want a confirmation from you that PPF is better than ELSS.
      Second is Recency Effect – Benjamin Graham Said that investors can only count till 3 so if something has happened for 2-3 years (negative or positive), they think this will be repeated in near future. 🙁

  2. Hi Hemant
    Many investors invest in ELSS funds via SIP route just like in diversified equity funds. However as there is a lock in period of three years, many financial planners advise that to avoid complications at the time of redemption it is better to make lump sum investments in these funds. What is your take on this?

    • Hi Anil,
      I don’t agree with people who say ELSS by SIP route is a bad idea – I am not sure why people want redemption exactly on completion of three years.

      • Hi Hemant
        I also feel that investment in ELSS funds should be treated just like investment in any diversified equity fund with investment horizon of more than five years. In any case in all other tax saving instruments investment horizon is more than three years.

  3. Hi Hemant,

    u said that ELSS is a one time investment, so no need to worry for tax rebate. just wanted to clear, what if someone has opted the ELSS SIP. like m investing 2K/month in an ELSS, then would it be considered for tax exemption afte DTC also.

    • Hi Prashant,
      It doesn’t make any difference that you are investing through SIP or onetime. The day that you finally came to know that ELSS is not a tax saving instrument – you can discontinue your SIP.

  5. Hi Hemant,

    Very nice article..You mentioned here about NPS.. But to my knowledge the returns of NPS are taxable and PFRDA is trying hard with govt to exempt the tax. Is that true?

  6. why u r so much against ulip or for say insurance, it seems u.had some bitter encounter with LIC , KINDLY MARK THE WORD LIC.
    elss. no doubt is a Gud option but at the same time ulips. n other insurance. products have their own importance . seen customers visiting insurance offices at their late 40’s and 50’s seeking life cover with Gud returns. why ? go ask elss to cover for whole life and give financial security to family through the same. COME ON DEAR , TRY TO SEE THE BRIGHTER SIDE.

    • Hi Manish,
      Hope you are not LIC agent – as you are stressing too much on LIC.
      Forget what you have read here on TFL – do your independent research & you will know the reality. Just to add Mr Hariharan (Chairman IRDA) has accepted that insurance industry is not selling insurance.

    • Hi Manish
      You should not confuse insurance with investment. Insurance is an expense which one has to incur to cover risk.Investment is done for creating wealth. Any product which mixes insurance with investment is a very expensive product. Only informed persons can understand this. Since most persons have very little awareness of financial matters it is not surprising that many people buy ULIP products which only create wealth for the agents at the cost of investors.

  7. Hi Manish,

    To add to what Hemant n Anil said..most of the people here who have joined TFL have all had bad times with LIC and other insurance policies with myself included. So the people who have experienced it are the ones who are going to share with the other people who are new to the investments or insurance so that at least those people do not make the same mistake that others did..This is what TFL is all about. Its a learning curve for everyone who are looking to plan their investment, insurance and to summarize its a complete financial planning guide. One should thank people like Hemant who is Certified Financial Professional n is giving lot of free advice to the people about financial planning..

  8. I have a question regarding ELSS, Suppose I have a folio of ELSS mutual fund on my spouse name and I pay to buy the units. Can I claim this on my 80c ? or it will be my spouse 80c.

      • Hi Hemant thanks for the reply,
        I have another Q, I was surfing through the internet and came across Time Deposit of Post office, the time duration for the deposit are 1yr, 2yr, 3yr, 4yr and 5yr. but I am not sure weather we can claim tax benefit for 1,2,3 and 4 yrs under 80c.
        Any idea?

  9. Hi Hemant,

    Can you explain this further as to WHY – “The day that you finally came to know that ELSS is not a tax saving instrument – you can discontinue your SIP”

    Is ELSS not a good investment if it is not a Tax Saving instrument? One of your articles you had mentioned – Tax saving should be the result of your investments and not vice versa.

    The reason I am asking this is I have not invested in Equities and am one of the many who have taken up Insurance policies. I would want to invest in ELSS as a good investment tool.

    Please suggest.

    • Hi Amit,
      Read my inline reply
      Can you explain this further as to WHY – “The day that you finally came to know that ELSS is not a tax saving instrument – you can discontinue your SIP”
      >Because you will not be getting any tax benefit.
      Is ELSS not a good investment if it is not a Tax Saving instrument? One of your articles you had mentioned – Tax saving should be the result of your investments and not vice versa.
      >ELSS is a great investment but why to lock funds when there is no tax benefit. One can invest in any diversified equity fund.
      The reason I am asking this is I have not invested in Equities and am one of the many who have taken up Insurance policies. I would want to invest in ELSS as a good investment tool.
      >Go Ahead 🙂

      • Thanks Hemant,

        I am looking for an investment of 5-7 years.

        After reading Ankur’s post if I am still investing in ELSS for a period mentioned would it be a good option?

        I will be investing through SIP for a period of 3 yrs and then leave the amount to grow (hopefully) and redeem it after another couple of years.

        Please suggest.

        Thank you.

  10. If ELSS is not part of 80c then there will not be any lockin period of 3 yrs, Fund Manager cannot place the money in a better way as they do with 3 yr lockin period. So the income will reduce and investment will become risky.

  11. Dear Sir
    After DTC
    Iam Expecting New Sec for ELSS
    Structure is
    * 5-10 years lock in
    * Investment Limit Is 100000
    This type of Investments only can gives us good returns

  12. Hi Hemant,
    I am a salaried person, having substantial regular monthly deduction from my salary to my PF & VPF account. Additionally, I have a PPF account. Whether all these funds can be regarded as debt funds? I’ve also started investing in a few diversified MF through SIP. Please suggest whether I should invest further in ELSS. What should be the ideal ratio of debt vs equity investment in one’s portfolio? Grateful, if you clarify.

    Regards

  13. Hi Hemant

    I started saving in ELSS since 2007 Rs 5k/month in 5 different funds via SIP. That time, I took decision on my own and identified 5 funds to invest @ Rs1k/month in each fund, surfing net, just to diversify my investment. I chose :- HDFC Taxsaver, Prudential ICICI Tax Plan, Kotak Tax Saver, Sundaram Tax Saver & SBI Magnum Taxgain. I have a plan to contiune investment for next 22 year (when I will be 57years old).
    My queries are:-
    1. Do you think I should continue to invest in 5 different funds? or look for 2-3 fund and remove 3-2 funds from my portfolil?
    2. I am assuming in next 5 years or so, my EPF will itself contribute to Rs 1Lac for 80C for tax planning purpose. At that time should I contine to invest in ELSS or should move to other open ended mutual funds?
    3. I am expecting a return of @ 15% yearly on my investment for next 22 year, is my target acheivable?

    Regards
    Hitesh

    • In my opinion you should not invest in more than 1-2 ELSS funds.

      If your 80C does not have any room then no need for ELSS, why block money unnecessarily? ELSS funds are as good as any other equity MFs.

      No one can guarantee returns on any equity investment but 15% does sound reasonable from equity investments.

      • Thanks Vivek! for your opinion.

        Which 1-2 ELSS funds you recomend for investing?

        Regards
        Hitesh

  14. Hello Hemant,

    A treat to read this article, specifically today.
    My accounts department gave me a figure against which I have to give them provisions / my investment details for tax saving purpose.
    Your article clarifies Section 80 C in detail.

    Besides this ‘Year End Tax Planning’, this article enhances the knowledge to a level where I can do computation of tax for myself.

    Thanks for the information shared.

  15. Hi Hemant,

    I’ve planned to invest in SIP of Rs 1000/- in each of these funds…Could you suggest any addition or substraction from this list…Or tell me if these are okay..

    Birla Sun Life MNC Fund (G)
    HDFC MidCap Opportunities (G)
    Reliance Equity Opportunity RP (G)
    UTI MNC Fund (G)
    ICICI Pru Focused Bluechip Equpty (G)
    UTI Opportinuties Fund (G)
    ICICI Pru Discovery Fund (G)
    Quantum Long term Equity (G)
    TATA Divident Yeild Fund (G)
    ING Divident Yeild Fund (G)
    Fidelity Equity Fund (G)
    HDFC TOP 200 (G)
    SBI Dynamic Bond Fund (G)
    HDFC Balanced Fund (G)
    HDFC Prudence Fund (G)
    UTI Equity Fund (G)
    Mirae Dividend Yeild (G)
    DSP Black Rock Equity (G)
    UTI Dividend Yeild (G)
    DSP Top 100 (G)
    Franklin India Blue chip (G)

    Best regards,
    Arindam

  16. Hi,

    My Age is 27 Now and My monthly income 22000. want to invest 15000 per month so that i will make my home in pune after 10 yrs. pls advise me for investment. i want invest in MF and Share Market.. pls advise for best MF Plan … or any best invest me …..pls comment

  18. Hemant Beniwal,

    hi i am looking to buy tax saving MF with SIP and my budget in to invest 3k per month would you please suggest me for which plan should i go??

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