Tax savings not needed? Then switch to non-ELSS funds or NPS

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May 19, 2020 12:30 AM

Tax savings not needed? Then switch to non-ELSS funds or NPS

Investment in ELSS funds qualify for tax deductions under the old tax regime, of up to Rs 1.5 lakh under Section 80C, in a given financial year.Investment in ELSS funds qualify for tax deductions under the old tax regime, of up to Rs 1.5 lakh under Section 80C, in a given financial year.

Last year I started investing in equity-linked savings scheme (ELSS) funds through SIP of `1,500 in three funds. Currently, I don’t need ELSS invest-ment for tax saving purpose. Should I continue or switch to non ELSS SIP?
—Selvakumar
Investment in ELSS funds qualify for tax deductions under the old tax regime, of up to Rs 1.5 lakh under Section 80C, in a given financial year. Each SIP investment (and lumpsums) into such funds is subject to a lock-in of 3 years from the date of investment. Given that there is no need to invest in ELSS funds for tax saving in future, for future SIP investments you may switch to other non-ELSS funds as it offers flexibility to access funds in times of dire need. For additional tax savings, you may consider investing in the National Pension Scheme (NPS) to avail the additional deduction of Rs 50,000 under Section 80 CCD (1B), available under the old tax regime. Ideally, an asset allocation-based approach (mix of equity and debt) should be followed for portfolio construction, as it is one of the key determinants of the portfolio’s performance.

Is there a lock-in period in gold ETF? How long should I stay invested?
—Raghu S Krishnan
Gold ETFs do not have any lock-in period. Gold ETFs are listed on stock exchanges and can be sold on the exchange to other market participants. Investors can also redeem units directly with the mutual fund. However, the minimum amount for direct transaction with the mutual fund is high; and hence retail investors are best suited to sell their units on the secondary market platform.

Gold’s importance as a diversifier has been re-instated even recently, as it delivered 43.41% in the last one year (as of May 12, 2020) compared with a negative 17.63% by equities (BSE 500 TR index). Although, over the long term (10-plus years) gold has underper-formed equity. From an asset-allocation standpoint, it is advisable to have some allocation to gold for diversification benefits at any point in time. You may restrict the allocation to gold to 5-10% of your overall portfolio. From a taxation standpoint, investment in gold (including ETFs) attracts taxation similar to that of debt funds. Capital gains for a holding period of up to three years are taxed at the marginal tax rate, while gains for a holding period of more than three years are taxed at 20% (excluding cess) post indexation.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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