Budget 2023 made the new income tax regime the default regime. Since this regime doesn’t give Section 80C benefits, ELSS, or tax-saving mutual funds, have lost their tax-benefit edge. Aside from taxpayers who would still opt for the old tax regime, it remains to be seen if ELSS funds can sell themselves purely on performance.
Aside from dealing a blow to debt funds, Budget 2023 (last year’s Budget) blew another hole in the Rs 50 lakh crore Indian mutual fund (MF) industry. It made the new tax regime the default tax regime, effective April 1, 2023. The move — an otherwise sound tax policy with lower rates, but no tax benefits — has left the Equity-Linked Savings Scheme (ELSS) out in the cold. Also known as tax-saving MF schemes, ELSS offers Section 80C tax deduction benefits up to a limit of Rs 1.5 lakh.
The current financial year (2023-24) will be the first where taxpayers will have filed their taxes under the new regime as the default one, unless they wish to switch back to the old regime, in which case they have to fill out a form.
What, then, is the future of ELSS where, as per anecdotal evidence, a majority of investors invest just to get the income-tax benefits? The future of ELSS appears to be in doubt as the government seems focused on enhancing, pushing, and popularising the new tax regime.
Changing strategies
Some mutual fund houses, such as PPFAS Asset Management Co Ltd, India’s 18th largest fund house with assets under management (AUM) of over Rs 60,000 crore, don’t talk much about tax savings anymore, even though that’s been the core purpose of Parag Parikh ELSS Tax Saver (PETS), its tax-saving fund. Neil Parag Parikh, Chairman and Chief Executive Officer, PPFAS Mutual Fund, says that when the window to invest internationally by mutual funds got shut in February 2022, unitholders demanded a pure India investment diversified scheme as an alternative to Parag Parikh Flexi Cap Fund (PPFCF), the MF’s flagship fund that used to invest up to 25 percent in international stocks. “That is when we told our investors to invest in PETS, ignoring the tax benefits it also gives,” says Parikh.
PPFAS MF has stuck to its long-standing belief to launch as few funds as possible and, among equities, stick to diversified funds. Since PETS and PPFCF are both diversified, the fund house projects the former as the latter’s alternative, minus the international stocks. Tax-saving funds, by law, are prohibited from investing in foreign securities.
“Barring the international exposure (of PPFCF), the strategy of both schemes is similar,” says Parikh, adding that PETS’ smaller corpus (Rs 2,761 crore) is also a good alternative for those who fear that PPFAS’ large corpus (Rs 55,034 crore) might slow it down. The narrative suited PPFAS because, by then, the new income-tax regime had come about.
Elsewhere, fund houses are optimistic about investors coming into tax-saving funds. The newly launched Zerodha AMC kicked off on MF Street in November 2023 with two schemes — one of which was a tax-saving fund called the Zerodha ELSS Tax Saver Nifty Large Midcap 250 Index Fund. The fund’s size has grown to Rs 46 crore, as per Value Research at the end of January 2024. Was its CEO Vishal Jain too brave to launch an ELSS in the same year that the new tax regime was made the default one?
Jain says that the compulsory three-year lock-in is beneficial for ELSS investors. He says that the Nifty 500 index has lost money a negligible number of times if you stay invested over any three-year period over the past few years. He is right. The Nifty 500 index has lost money just 6 percent of the time, as per a three-year rolling return analysis between 2009 and date (on daily basis). Here, we checked out (multiple and with a daily frequency) 3-year returns over a period spanning 2009 and date. “The lock-in ensures that investors weather the ups and downs in the market better as they cannot panic and withdraw during volatile phases,” says Jain.
Read more: https://www.moneycontrol.com/news/business/personal-finance/has-the-new-income-tax-regime-killed-tax-saving-mutual-funds-not-yet-but-12316171.html
© 2018 CA Chandan Agarwal. All rights reserved.