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Does Direct Tax Code spell doom for Tax Saving Funds

Starting April 2012, Equity Tax Saving Schemes will lose its long held status of a Tax saving instrument. Investment expert Hemant Rustogi provides us an insight on these schemes and effect of DTC on them.

April 12, 2011 / 02:40 PM IST

Come April 2012 and equity linked savings schemes (ELSS) will disappear from the investment universe of investors. The Direct Tax Code (DTC) provisions will not only take away the flexibility that investors enjoy currently while investing to save taxes but also one of the most efficient and perhaps potentially the best investment option in terms of returns. Currently, ELSS and ULIPs are the only two options through which investors can save taxes and have exposure to equities.

Under ELSS, one can invest up to Rs.1 lac and save taxes under Section 80C of the Income tax Act. Over the years, ELSS has emerged as an ideal option to save taxes for those who believe in equity as an asset class to build wealth over time. The tax savings combined with the mandatory lock-in period allows investors to take a long-term view and in turn reap the benefits of this approach. That is why ELSS is considered as the best example of an investment option that provides investors a simple way to invest in the stock market and save taxes while doing so.

Another notable feature of the ELSS is the tax efficiency in terms of returns earned from them. As per the current tax laws, an equity fund investor is entitled to earn tax free dividend and  long-term capital gains i.e. capital gains made out of an investment held for 12 months or more. 

ELSS is governed by the guidelines issued by the government of India. These guidelines have specified the minimum investment amount to be Rs.500 and thereafter-in multiples of Rs.500. Being open-ended funds, ELSS also allow investors to invest in a disciplined manner through SIP. A disciplined approach goes a long way in not only allowing an investor to turn the market volatility to his advantage by benefiting from

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