ELSS schemes inflows may be hit by new tax regime

Investment under ELSS schemes comes with a three year lock-in period and qualifies for deduction under section 80C of the IT Act.

ELSS schemes inflows may be hit by new tax regime

The inflows in equity linked savings schemes (ELSS) this year may be impacted somewhat by the higher tax exemption in the new tax regime and the lacklustre performance of a few large schemes.

The last three months of the financial year typically brings in higher inflows into these funds from investors looking to save tax. The category saw inflows of Rs 564 crore in December followed by Rs 1,414 in January.

Investment under ELSS schemes comes with a three year lock-in period and qualifies for deduction under section 80C of the IT Act for an amount up to Rs 150,000 every financial year. It has one of the lowest lock-in period as compared to other tax-saving products. For instance, PPF, a popular instrument with investors comes with a higher lock-in of 15 years.

“For us, the tax plan has done well from a collection perspective this year despite apprehensions to the contrary. The ELSS schemes for the industry as a whole have not fared so well from a 3-year returns perspective, which has taken the sheen away from the category a bit,” said Swarup Mohanty, chief executive at Mirae Asset MF.

For instance, Axis Long Term Equity Fund, the largest equity fund in the category with assets of over Rs 28,000 crore, is also the worst one-year performer with returns of -3.5%. For a 3-year period, the scheme has returned 9.2%. Aditya Birla Sun Life Tax Relief 96, with assets of over Rs 13,000 crore, has given 4.8% and and 8.7% returns, respectively for the same periods. Both these schemes have significantly underperformed the  benchmark Nifty 50, which has returned 9% and 61% in 3 and 5-year periods, respectively.

This year’s Budget raised the tax exemption to Rs 7 lakh per year for individuals from Rs 5 lakh per year earlier for those under the new tax regime. This may likely impact flows into the ELSS segment.

“The focus on migrating tax payers to the new income tax regime, there would be some negative impact on the trend of financialization of savings in the new regime since there is no incentive for investments by way of deduction for specified investments or expenses under Chapter VI-A. This migration could potentially kill the 80C investments industry. Under the new regime, there would be no push for ELSS investments or availing housing loans due to interest rebate. The growth of the ELSS category has been slowing for the past few years and with push towards new regime, the growth of ELSS category would be further challenged,” said Jimeet Modi, founder & CEO, SAMCO Group.

The Securities and Exchange Board of India recently allowed mutual funds having existing active equity-linked savings schemes to launch passive ELSS schemes provided fresh flows to such existing active schemes are halted.

Passive ELSS is expected to be cheaper, with lower expense ratio of 10-25 bps compared to active schemes which typically charge over 1%. A lower expense ratio can help investors get higher returns, especially over a longer term of 10-15 years, according to experts.

An ELSS must invest at least 80% of its assets in equity and equity-related instruments. The assets under management (AUM) of the ELSS category stood at over Rs 1.5 trillion as on January 31, 2022.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 08-03-2023 at 05:00 IST
Exit mobile version