A reader asks, “My question is about the significance of ELSS funds in the future due to the new tax regime. Can we continue investing in these funds?”
Budget 2023 has made the new tax regime the default scheme with an option to continue using the old scheme. The new regime has significant tax cuts with no tax on income of up to Rs 7 lakhs (net taxable).
To appreciate the gravity of these changes, let us consider a relevant example using the New Tax Regime vs Old Tax Regime Calculator.
Consider an individual earning 15L per year.
- The new tax regime (NTR) will result in a tax of Rs. 1,45,600 from 1st April 2023. Before that, the NTR tax is Rs. 1,95,000.
- Now just to ensure that the old tax regime (OTR) tax is equal to Rs. 1,45,600, deductions of Rs. 3,58,333 is necessary for deductions.
- This means that 80C, 80D and Rs. 50,000 NPS investment alone are not enough for a taxpayer to choose the OTR. A home loan interest and/or significant HRA is crucial.
So what does this have to do with ELSS mutual funds?
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Suppose you have a home loan, and you wish to deduct up to Rs. 2 lakhs of the interest component from your taxable income. You will pay 34% more tax in OTR than in the NTR (from 1st April 2023!)!
Assuming you are not eligible for HRA (very few taxpayers can avail of tax deductions under both home loan interest and HRA simultaneously), you will need an additional Rs. 1,58,333 in deductions just to lower OTR tax to NTR tax from 1s April 2023!
It makes no sense to invest that much among 80C and 80CCD(1B) products just to pay less tax! It is high time we ask, what is our goal here? To build enough wealth in suitable products for our future needs or to save tax? Naturally both! The point is, both can be done easily without buying unnecessary products in the new tax regime! So why chase after tax-saving products? Also see: Budget 2023 wants us to shift from tax-saving to wealth-creation mode – are we ready?
Therefore we recommend the following wrt ELSS mutual funds. Thankfully ELSS mutual funds have the shortest lock-in, and there is no investment commitment!
- Opt for the new tax regime.
- Stop all SIPs in ELSS mutual funds.
- Continue your existing investments in ELSS until you are satisfied with their performance, or you will have to rebalance from equity to debt.
If you have not yet done so, list your goals and decide the suitable asset allocation and how much you need to invest, along with a risk reduction strategy.
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