The tax-saving Equity Linked Savings Schemes (ELSS) have registered a net outflow over the past three months despite overall investments in other equity schemes reaching new highs.

Once popular with the middle and lower income tax payers, ELSS has been losing its appeal to the larger section of investors after the launch of the new tax regime.

The outflow from tax saving schemes have doubled to ₹445 crore last month against an outflow of ₹144 crore in April. And the Inflowsplunged 87 per cent to ₹1,041 crore last fiscal, against ₹7,744 crore logged in FY’23.

The New default

The new tax regime was introduced in 2020-21 and was subsequently made the default regime. The old tax regime provides substantial exemptions and deductions which, if availed, can reduce an individual’s income tax liability. These exemptions and deductions are not available under the new tax regime.

Shridatta Bhandwaldar, Head – Equities, Canara Robeco Mutual Fund, said the tax saving schemes might not be finding favour with most investors after the introduction of the new tax regime. Fund managers of this scheme have to adopt flexi-cap investment strategy to compete with other category and they can also score because the flows are more sticky as it comes with three-year lock-in, he added.

In a bid to make ELSS and passive funds more attractive, capital market regulator SEBI allowed mutual fund houses to launch low-cost passive ELSS in May 2022.

However, SEBI has made it clear that a fund house can either have an active ELSS scheme or a passive ELSS scheme and not both.

Like any other passive funds, the scheme will also generate returns by mimicking the underlying index. The fund will be based on any index comprising shares from the top 250 companies in terms of market capitalisation.

Akshat Garg, AVP, Choice Wealth, said besides the impact of new tax regime, many investors may be redeeming their investments due to completion of the mandatory three-year lock-in period as markets are hovering at record highs.

Moreover, he said the rebalancing of portfolio by investors seeking more aggressive allocations could be another significant driver as ELSS investments predominantly include large caps.

Palka Arora Chopra, Director, Master Capital Services, said ELSS funds come with tax benefits along with the lowest lock-in and highest return potential among all the tax exemption products under Section 80C of Income tax Act, hence, it is expected that continuous fund inflow in ELSS schemes will keep happening, going forward. Investors are also cautiously watching outcomes of the Budget for clarity on Income Tax relief, she said.

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