The Finance Minister Arun Jaitley, presented the Union Budget on February 1st 2018. An LTCG tax of 10% was introduced on equity-oriented mutual funds. All capital gains till Rs 1 Lakh a year, would be tax-exempt. LTCG tax of 10% would be effective from April 1st 2018 with a grandfathering clause.
Grandfathering clause is an exemption granted to you and other existing investors on equity shares and equity-oriented mutual funds on profits made till January 31st, 2018. This is the time to talk about an investment, very popular with the youth in India, known as ELSS. Equity Linked Saving Scheme popularly called ELSS, invests most of your money in stocks. ELSS is an excellent investment to save tax.
ELSS used to enjoy the EEE benefit. The money you invest in the ELSS, enjoys Section 80C benefits up to Rs 1.5 Lakhs a year. The returns you get and the money withdrawn after the compulsory 3-year lock-in, were tax-free. But, ELSS withdrawals are no longer tax-free. An LTCG Tax of 10% has been introduced on capital gains of over a lakh on equity-oriented mutual funds, including ELSS.
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Many youth in India love to take risks. ELSS is a perfect fit for these youth. ELSS invests your money in stocks to give high returns, but at high risk. ELSS has a compulsory 3-year lock-in and you are forced to stay invested in equities for this time. Any investment in equities over the long-term, generally gives good returns.
With the introduction of an LTCG Tax, many investors want to flee ELSS. But, is this a good idea?
Before LTCG Tax was introduced on equity-oriented funds, both the ELSS and PPF enjoyed the EEE benefit. Now, ELSS no longer enjoys this benefit. While the withdrawals from PPF continue to remain tax-free, ELSS withdrawals will be taxed if capital gains exceed Rs 1 Lakh in a financial year.
So is PPF better than ELSS? ELSS invests most of your money in stocks, and gives high returns at high risk. As equities generally perform well over the long-term, ELSS with a compulsory 3-year lock-in could give high returns.
If you are an aggressive investor, ELSS is still your best bet. Even if you have to pay an LTCG Tax of 10% a year, you still get a higher return than PPF, which offers just 7.6% for January - March 2018.
Aggressive investors must not say goodbye to ELSS, just because of LTCG.
SEE ALSO: How To Save LTCG On Equity Mutual Funds?
After FM Arun Jaitley introduced an LTCG tax on equity-oriented funds, insurers have started heavily marketing Ulips, stating that returns from Ulips are tax-free. But, financial advisors are saying, investing in Ulips might not be a good idea. It's better to invest in ELSS whose returns are taxed, but could offer high returns. Ulips offer tax-free returns, but returns could be low.
ELSS has a lock-in of 3 years compared to Ulips which have a 5-year lock-in. So, ELSS is more flexible than Ulips. If an ELSS underperforms, you can exit the investment, after the 3-year lock-in and shift to another ELSS. With Ulips, you are stuck for a much longer time, and switching is between funds, offered by that Ulip.
ELSS + PPF is your best bet, when it comes to saving tax under Section 80C. The combination of ELSS and PPF gives 3 benefits.
So don't run away from ELSS. It's still a great investment for aggressive investors in India. Be Wise, Get Rich.
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