Capital Markets: Challenges and Developments

Decline in popularity of Equity Linked Savings Schemes (ELSS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Equity Linked Savings Schemes (ELSS); Section 80C of the Income Tax Act.

Why in the News?

  • Equity Linked Savings Schemes (ELSS) are mutual fund schemes that offer tax benefits under Section 80C of the Income Tax Act.
    • Recently, ELSS has seen a decline in popularity, with more money being withdrawn from these schemes than invested.

What is Section 80C of the Income Tax Act?

  • Section 80C permits certain investments and expenses to be tax-exempted.
  • By well-planning the 80C investments that are spread diversely across various options like National Savings Certificate (NSC), Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), etc., an individual can claim deductions up to Rs 1,50,000.
  • By taking tax benefits under 80C, one can avail of a reduction in tax burden.

About Equity Linked Savings Schemes (ELSS)

  • An ELSS fund or an equity-linked savings scheme is the only kind of mutual funds eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961.
  • Investors can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.
  • ELSS mutual funds’ asset allocation is mostly (65% of the portfolio) made towards equity and equity-linked securities such as listed shares.
  • They may have some exposure to fixed-income securities as well.
  • These funds come with a lock-in period of 3 years only, the shortest among all Section 80C investments.
  • Being market-linked, they are subject to market risk, but may offer potentially higher returns compared to traditional tax-saving instruments like National Savings Certificate (NSC) or Public Provident Fund (PPF).

Recent Trends in ELSS

  • In the past few months, more money has been taken out of ELSS than put in.
  • For example, last month ₹445 crore was withdrawn, while in April it was ₹144 crore.
  • In the last fiscal year, only ₹1,041 crore was invested in ELSS, compared to ₹7,744 crore the previous year.

Impact of the New Tax Regime

  • A new tax regime was introduced in 2020-21, which is now the default option.
  • The old tax regime offered various tax exemptions and deductions, helping to reduce income tax.
  • These benefits are not available under the new tax regime, making ELSS less attractive to investors.

PYQ:

[2021] Indian Government Bond Yields are influenced by which of the following?

  1. Actions of the United States Federal Reserve
  2. Actions of the Reserve Bank of India
  3. Inflation and short-term interest rates

Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3

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