Should you invest in ELSS under the new tax regime?

A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.

Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.

The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.

Should you invest in ELSS under the new tax regime?

The new tax regime in force from 1 April 2020 offers individuals and HUF taxpayers the possibility to choose between lower tax rates by waiving certain exemptions and higher tax rates while making use of exemptions (old tax regime). The new tax regime may not be suitable for everyone. Taxpayers must assess the tax savings made under both the old and new regimes to take a call.

For taxpayers who have home or education loans, tax-deductible life insurance policies, a salary over 15lakh higher, or who can save a lot through exemptions, the older regime may be more suitable. So these taxpayers may consider investing in ELSS to save taxes under the old tax regime. The new regime definitely saves you from a lot of paperwork at the end of the year in terms of submitting investment evidence compared to the old tax regime, but the old regime also helps you make a few major investment and saving decisions. It forces you to make these investments or savings every year, whether it’s ELSS, retirement plan, or PPF. Some taxpayers may already have SIPs in ELSS. They should assess the tax benefit in both schemes before discontinuing their SIPs.

Which tax regime will help you save more on taxes will depend entirely on your income and salary structure? You should consult a tax advisor if you are unable to calculate your tax liability in both tax regimes yourself. Such a comparison can only guide you with your decision to continue investing in ELSS which not only helps you save taxes, but gives you the growth potential of stocks. Even if the new tax regime suits you better, you can still consider investing in ELSS from a wealth creation perspective. If you’re someone who tends to retreat during volatile markets, the lock-in period will help you stay on your feet and overcome short-term volatility. Since ELSS funds have a lock-in period of 3 years, if you invest today, you can only take your money out after 3 years in case of a lump sum investment. The blocking period is also applicable to each SIP payment. If you want to withdraw the full amount invested in 12 months, you will have to wait until the last SIP installment has completed 3 years.

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