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Will ELSS get exclusive Rs 50,000 tax deduction?

Many mutual fund managers are hopeful that ELSS would get an exclusive tax deduction of Rs 50,000, over and above Rs 1.5 lakh in this budget

Will ELSS get exclusive Rs 50,000 tax deduction?

Will Equity Linked Savings Schemes (ELSSs) finally get lucky this time? Many mutual fund managers are hopeful that ELSS would get an exclusive tax deduction of ₹50,000, over and above ₹1.5 lakh deduction permitted under Section 80C of the Income Tax Act, in this budget. Currently, ELSS or tax saving mutual fund schemes qualify for tax deduction of up to ₹1.5 lakh under Section 80C.

"AMFI has proposed it. We are quite hopeful that ELSS may get an exclusive deduction like National Pension Scheme in this budget," said a senior mutual fund manager with a large private sector mutual fund. Investments in National Pension Scheme (NPS) qualify for an exclusive tax deduction of up to ₹50,000 under Section 80CCD(1B) of the Income Tax Act. "RGESS failed to get new investors into the market. So, we think an extra tax deduction for ELSS may be tried out this time," added the fund manager.

Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced to lure first-time investors to the stock market. It allows investors with less than ₹12 lakh annual income and those who have never traded in stocks using a demat account to invest up to ₹50,000 and claim a tax deduction of up to 50 per cent of the amount invested under Section 80CCG. The extra deduction was over and above ₹1.5 lakh deduction permitted under Section 80C. However, RGESS never took off as it proved to be a bit complex for the new equity investors. That is why the mutual fund industry believe that the government may try to entice more retail investors into the stock market with an additional tax deduction for tax saving mutual funds.

Extra tax break or not, we always held that individual taxpayers should never let go of an opportunity to invest in ELSS and claim a tax deduction under Section 80C. We believe that ELSS or tax planning/saving mutual fund schemes are the best tax saving option available to investors under Section 80C to create wealth over a long period. In fact, we think it should be the first equity mutual fund investment for first-time investors. It has the lowest lock-in period of three years among the investment options available under Section 80C and it has the potential to offer superior returns over a long period because it invests mostly in stocks. The mandatory lock-in period of three years would also help new investors to weather volatility in the stock market and pocket attractive returns. The top-performing ELSS has given around 18 per cent returns in the last five years.

See: How Tax Saving Funds performed?