New income tax regime: Will ELSS mutual funds lose their charm?

The ‘revised’ new tax regime is likely to end the dream run enjoyed by Equity Linked Savings Schemes or tax saving mutual funds as a smart choice to save taxes under Section 80C of the Income Tax Act. Under the old income tax regime, taxpayers can invest up to Rs 1.5 lakh in ELSS funds in a financial year and claim tax deductions on the contribution under Section 80C.

The new tax regime doesn’t allow any tax deductions but it allows a large tax rebate of Rs 7 lakh. According to financial experts, if you are not claiming a very large House Rent Allowance or any other deductions, the new regime would be better for average taxpayers. For example, the old tax regime allows deductions under Section 80C, HRA exemption, Section 80D, LTA, and so on.

Financial advisors say most new taxpayers are likely to opt for the new regime as it allows them to pay taxes easily, without elaborate tax planning. The old regime calls for meticulous planning through the year if one wants to avoid the last minute rush. Even last-minute tax savers are likely to opt for the new regime if they run out of time. This is likely to result in less number of taxpayers opting to save taxes by investing in ELSS funds, say investment advisors.

It is apparent that the government wants taxpayers to move to the new tax regime as it is more transparent and easy to comply and administer. The government has made it the default option for everyone. If the government allows a large rebate in future, nobody would opt for the old tax regime and shift to the new tax regime. In such a scenario, ELSS may lose its relevance.

However, none of this should give you the idea that you don’t have to plan for your long-term goals like retirement. It is always better to use stocks or equity mutual funds to achieve your long-term goals as equity has the potential to offer higher returns over a long period of time. Making higher returns than the inflation rate is extremely important if you want to create a large corpus over a long period.

If your investment option offers tax breaks, that is the extra benefit. However, even without tax breaks, you should invest in an equity scheme that matches your risk profile to achieve your long-term goals.