ELSS Investment: Will the momentum continue post LTCG?

There is a unique trend while investing in equity-linked saving schemes (ELSS). Majority of investments is made in the during the last four months of any financial year. The data for last three fiscal year ending March 2017 shows that half of the yearly investment made in ELSS comes during December – March, and out of this half of the investment is made in the month of March. In simple terms, March attracts one-quarter of total yearly investments made in ELSS.

Latest AMFI data shows that the momentum is intact for the month of December 2017 and January 2018, when the combined inflows in ELSS witnessed a growth of 85% on yearly basis to Rs 4294 crore.

However, the anecdotal evidence suggests that with the introduction of LTCG, many investors have become anxious about investing in ELSS, as it has lost its stature of EEE (Exempt, Exempt Exempt). Earlier, the amount invested was allowed for deduction and investor could claim a tax deduction from his salary, similarly, the second exempt implies that you don’t have to pay any tax on the returns earned during the accumulation phase. The third and final exempt meant that your income from the investment would be tax-free in your hands at the time of withdrawal. However, with the re-introduction of LTCG, one of the exempt will go away and tax needs to be paid on capital gains.

We believe, there is nothing to worry and one can keep on investing in ELSS as two E’s are still available. Moreover, our back of envelope calculation shows that if you are investing Rs 1,50,000(max amount of deduction allowed under Sec 80 C of IT act) in a year, your money need to grow atleast by 18.56 per cent annually, before it need to pay tax (assuming this is the only equity investment made by you and you are booking profit after three years). Hence, the momentum is likely to continue for this year too.