Gets a budget boost

Investors like Thakkar are happy that after this budget they can go all the way up to Rs 1 lakh in their ELSS investments, up from the Rs 10,000 limit till now. Though the Section 88 rebate is gone, investments in select instruments which includes all those that were allowed under Section 88 up to Rs 1 lakh can now be claimed as a deduction from total income, reducing taxable income by a similar amount.

Another reason that makes ELSS even better is that the Section 88 rebate was only for those with taxable incomes of less than Rs 5 lakh. Now anybody can avail the deduction of Rs 1 lakh, irrespective of their income levels. Since the higher income households may have larger surpluses to deploy and therefore they can take a higher risk, the new tax regime opens up a new avenue for them to invset in a tax advantaged instrument like ELSS.

ELSS products look good also because returns from most traditional forms of investment like NSC, post office MIPs are moving down, partly due to the removal of the tax exemption to income under Section 80L. 8220;As a result of this, investment options like bank deposits and national saving schemes become less attractive and money lying in them is likely to find its way to other products like pension plans, debt and equity schemes of mutual funds and other long term equity-linked products,8221; says Pankaj Razdan, MD, Prudential ICICI Asset Management.

Points out Razdan that in the past, the natural choices for tax saving instruments had a debt bias. 8220;The removal of 80L is a subtle nudge away from debt instruments. As a result, investors are likely to now turn their attention to long term investments in equity products like mutual funds and other capital market linked products8221; he adds. Since there is a lock-in period of three years, ELSS appeals more to the long-term equity market investor.

But how risky is this investment and what kind of returns are possible? 8220;Since ELSS invests 80 per cent in equities, while a PPF scheme will give a return of just 8 per cent, long term return on ELSS can be up to 25 per cent,8221; says Naresh Garg, CIO, Sahara Mutual Fund. Of course, in a bad market, while the PPF will continue to give the promised return, the ELSS could erode your capital subastantially 8211; the risk of equity falling in value is always there. As Government of India backs PPF, it is essentially a risk-free investment and therefore the risk is only of inflation earing into the value of the return. 8220;ELSS, investments are exposed to market risk. However, this risk is commensurate with the potential for higher returns,8221; points out KN Sivasubramanian, senior portfolio manager Equity, Franklin Templeton Investments.

Another advantage offered by ELSS is liquidity, an attribute that is not shared by products like PPF and NSC that are long term instruments with a lock in of six to 15 years. Since an ELSS invests upto 80 per cent in equities across different sectors depending on the investment philosophy of the fund house, an ELSS is ideal for investors who are looking for capital appreciation over the medium to long term, along with tax benefits.