Investors wanting to save for the long term and bag tax benefits through equities may find one option less under the Direct Taxes Code (DTC). Equity-linked savings schemes (ELSSs), which attracted a lot of investor interest, have been excluded from Section 80C.
Financial planners rue this. For them, ELSS is a form of compulsory equity investment, vital for amassing funds over the long term. Also, the entire investment is tax-free, owing to its three-year lock-in period (no capital gains in equities after one year).
The unhappiness of financial planners is not unjustified. Birla SunLife Tax Plan, for instance, has returned 20.72 per cent annually since launch in 2009. Similarly, HDFC Tax Saver, launched in 1996, has returned 31 per cent annually.
Other instruments under Section 80C havn’t quite churned out spectacular returns, majorly because these have a limited investment mandate. Consider this: A Public Provident Fund would give you annual returns of 8.6 per cent; a five-year fixed deposit (also eligible for Section 80C benefits) would give a return of 9.25 per cent (State Bank of India fixed-deposit rates).
The New Pension Scheme (NPS) and the unit-linked insurance plans are other equity options. However, NPS is constricted as fund managers can only invest 50 per cent of the corpus (even for the aggressive) in the indices — Nifty and Sensex —limiting thus their ability to pick stocks and generate higher returns. Ulips, being an insurance product, is not preferable.
ELSS was the only scheme that allowed fund managers to actively pick stocks and take longer-term calls because of the lock-in period. As Sadique Neelgund, a certified financial planner says, "Investments under Section 80C are intended to help individuals build a retirement corpus. An equity component works best for this."
While the DTC may not come into play this Union Budget, for investors, this could be their last opportunity to get locked in an actively-managed equity fund.
But, one needs to do this in a planned manner. If falling short of tax obligations under Section 80C this year, invest a lump sum — or do it in one or two tranches — during the next month. Start a systematic investment plan (SIP) for the next financial year, from April.
This will help you in two ways: There will be clarity as to ELSS (whether in or out of Section 80C), with the Union Budget on March 16. Two, if it is still allowed, you can plan to invest for the long term through these schemes.
The most important thing, however, is whether you can do so after exhausting all your options (Employee Provident Fund, children's education, life insurance and others) under Section 80C. Only if you have exhausted the options, it makes sense to invest in these schemes.
"This is because if one has exhausted the limit by investing in these instruments, an equity-diversified fund can be a better option due to its liquidity —one can enter or exit the scheme at will," adds Neelgund. Equity-diversified schemes are better, simply because of the liquidity they offer in comparison to ELSS, which suffers from a lock-in period.
Like any equity scheme, ELSS offers both dividend and growth options. The growth option is preferable for long-term wealth accumulation, as any incremental amount will get reinvested and compounded. Those in need of cash or pensioners can opt for the regular payouts or the dividend option.