Investing lumpsum amount in ELSS in March 

Equity Linked Saving Schemes (ELSS) is one of the available investment options under Section 80C and is steadily emerging as a preferred investment choice amongst the investors for tax saving. This is also reflected in the ELSS Category AUM (Assets Under Management) of Rs. 1.04 lakh crores as on 31st December 2019 amounting to around 4% of the overall industry AUM. Further, while it is the 3rd largest equity fund category in terms of AUM size, it is the largest equity fund category in terms of investor folios with 1.24 crore investor folios (Source: Association of Mutual Funds in India – AMFI). 

The popularity of ELSS as a tax-saving product can also be attributed to the inherent benefits under ELSS to the investors, including the lowest lock-in period of 3 years, the potential of higher returns, etc. However, while analysing the net inflows data for the previous two fiscal years, a trend has emerged that most of the Indian taxpayers tend to exercise their tax benefits only during the last few months of the year. The net inflows into ELSS during the last quarter of the financial year tend to dominate the overall collection in ELSS funds, as also illustrated in the table below:

For the investors who have not yet utilised their tax benefits under Section 80C, you can still use the balance time left to make lump sum investment in ELSS. Here is what benefits such investment in ELSS can entail for the investors:

Lower Lock-in Period

The lock-in period of 3 years under ELSS funds is the lowest amongst all the investment options under Section 80C. As such, the investor enjoys the liberty to liquidate their investments post the expiry of 3 years. Further, while most of the investment options mature automatically at the expiry of the specified period, one can continue to stay invested in ELSS even post the expiry of the lock-in period of 3 years. As such, one can align their financial plans with their tax-saving goals and link their ELSS investments with financial goals with an investment horizon of more than three years.

Potential of Higher Returns

While most of the investment options under Section 80C offer guaranteed returns, ELSS equips the investors with the potential of higher returns, as the returns are linked with the performance of the securities in the underlying portfolio. ELSS funds have generated 10.11% annualised returns over the last 3-year period and the performance over the last ten years has even been better with 11.70% annualised returns (Source: Value Research Online, data as on 31st January 2020). 

Note: Past Performance is not a n indicator of future returns.

Low Tax Incidence on Returns

The returns in the form of capital appreciation from ELSS funds are taxable as Long-Term Capital Gains (LTCG). As such, the investors are liable to pay tax at a special rate of 10% on gains from such investments (after exemption up to Rs. 1 lakh every year for all LTCG from equity shares and equity-oriented mutual funds, including ELSS). 

Considering the benefits of ELSS investments, you can invest in ELSS for accomplishing your long-term financial goals, instead of just being seen as a tax-saving investment product. While you may invest in ELSS funds in a lump sum now, make sure you also register a Systematic Investment Plan (SIP) right away for the next financial year and make investments in a staggered manner spread across the year. Happy Tax Saving! 

Note: The tax benefits as mentioned in the article are for illustrative purposes only, and are mentioned as applicable for the financial year 2019-20. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption and not on the date of investment. The investors must also note that the benefits of Section 80C are not available from the financial year 2020-21 onwards for the taxpayers who opt for the new reduced tax rates, as per Union Budget 2020 presented by the Govt. on 1st February 2020. Contact your tax advisor for more details.