Output of Rs 2000 cr in 6 months! New Income Tax Regime Affects ELSS Mutual Funds

Under the new tax regime, investors do not have the benefit of tax savings previously offered under Section 80C and it has reduced the interest of investors in investing in ELSS mutual funds.

“Fund outflows from ELSS can be partially attributed to the increasing adoption of the new tax regime. Under this new tax structure, taxpayers no longer receive tax benefits under Section 80C, which reduces the incentive to invest in ELSS funds. As a result, investors are more inclined to explore other open-ended mutual fund options,” said Manish Kothari, co-founder and CEO, ZFunds.

“As existing investments in ELSS funds reach the end of their lock-in period, investors are likely to withdraw their funds, especially if the investments were made with the primary objective of tax savings. However, if these investors have switched to the new tax regime, they are less likely to reinvest in ELSS funds due to the absence of tax benefits. This change in investment behavior could be a significant factor contributing to the observed outflows from ELSS funds,” he added.

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According to the monthly data released by the Association of Mutual Funds in India, ELSS funds have witnessed an outflow of Rs 2,030 crore since April 2024, with the highest outflow seen in July of Rs 637 crore. As of April 2024, based on monthly returns, ELSS mutual funds offer an average return ranging between 0.88% and 7.16%.

With these funds offering positive returns month on month, should an investor make an allocation to ELSS funds at this time? The expert believes that these funds are recommended for investors who invest to save taxes. Therefore, investors who want to build a long-term equity portfolio should consider non-ELSS funds for investments.

“These funds are only recommended for investors who want to invest to save taxes. Investors looking to build long-term equity portfolios should consider investing in non-ELSS open-ended mutual fund schemes. The options, in terms of fund management strategies and themes that investors can participate in, through Non-ELSS Schemes are advantageous for investors,” recommends Kothari.

The finance minister has made changes in the income tax slabs under the new tax regime in Budget 2024. The new tax regime does not allow deduction of common deductions like Section 80C deduction up to Rs 1.5 lakh for investments and expenses specific. Any individual opting for the new tax regime can now claim only two deductions – standard deduction of Rs 50,000 from salary/pension income and Section 80CCD (2) for employer contribution to employee’s NPS account.

With the introduction of a new tax regime and no deduction under Section 80C, do ELSS funds now look attractive?

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According to the expert, investors who have or are opting for the new regime should consider other equity funds for their portfolio other than ELSS funds.

“No, investors opting for the new tax regime should consider non-ELSS products for their equity portfolio,” Kothari said.

Over the last three years, ELSS funds have offered an average return of 16.83%, with the highest return offered by the Motilal Oswal ELSS Tax Saver Fund of around 26.63% over the same period. Axis ELSS Tax Saver Fund, the largest managed asset-based ELSS fund, gave the lowest return of 8.21% over the same period.

So far in 2024, ELSS funds have offered an average return of 24.83%. Motilal Oswal ELSS Tax Saver Fund gave the highest return of 47.41%, followed by HSBC ELSS Tax Saver Fund which gave a return of 35.71%. The Samco ELSS Tax Saver Fund offered the lowest return of 10.97% over the same period.

Following the latest performance of these funds, what are the prospects for these funds?

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“Under the new tax regime, ELSS funds should now be considered part of an investor’s flexi-cap/multi-cap portfolio. In these categories, investors have the option to choose from a wide variety of fund management strategies. Investors are advised to consider non-ELSS schemes for their flexi cap/multi cap portfolios,” Kothari said.

ELSS or tax saving schemes help investors save on income tax under Section 80C of the IT Act. One can invest a maximum of Rs 1.5 lakh in a financial year and claim deductions on investments in a financial year. ELSS funds invest in equities and carry high risk. These schemes have a mandatory loyalty period of three years. Other investment options under Section 80C have a longer holding period.

ELSS or tax saving schemes enjoy EEE (Exempt-Exempt-Exempt) status. EEE status means that the amount invested, the income earned and the value at maturity are exempt from income tax.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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