Tax Benefits Of Scheme May Be Lost Once DTC Takes Effect From '12
ASSET management companies (AMCs) may leave no stone unturned to push equity-linked savings schemes (ELSS) as tax-savers, probably for the last time before the country moves to the direct tax code (DTC) next year.
As per the proposed DTC effective April 1, 2012, investors will not be able to get tax benefits if they invest in ELSS or insurance-based tax saver unit-linked insurance plans (Ulips).
Fund houses are going all out to promote ELSS in a big way. This could probably be the last year when it could be sold as a tax saver to investors.
Fund houses are offering higher trail commissions and holding sales contests (with junkets and other prizes) to push distributors to sell the product, which accounts for over 4% of overall mutual fund assets. As it happens every year, ELSS will have to fight it out hard with Ulips to mobilise chunky investments from investors who would want to reduce the taxable portion of their income.
The contest looks evenly poised with ELSS trying to come to terms with its distribution problems and Ulips trying to reinvent itself after the Insurance Regulatory and Development Authority (Irda) introduced a series of changes with regards to distribution.
While the general consensus is that Ulips will pocket more money, thanks to its wider distribution reach and significantly higher commission, ELSS is likely to log huge inflows on the buoyant market and higher trail fees.
The ELSS category has delivered annualised returns of at least 33% over the past one year. This is much higher than the returns investors will get on other instruments under section 80C (5-year deposits, NSC and PF & PPF), which average 7-8%.
More alluring are the tax implications — investors get tax exemption benefits, dividends are tax-free and profits made on selling units are not taxable. All these may change once the country adopts the DTC.
"Investment in ELSS is eligible for deduction under Section 80C currently. Moreover, the payout after the lock-in period is also tax-exempt. This may not be the case once DTC is introduced," said Amitabh Singh, partner-tax & regulatory services, Ernst & Young.
The average asset-base of ELSS schemes have risen from 12,160 crore in October 2008 to . 13,730 crore in April 2009 and 21,700 crore on October 2009, 24,485 crore in April 2010 and 27,474 crore as on September 2010. Distributors expect the asset base to increase to 35,000 crore by the end of this fiscal.
Fund houses are working out plans to incentivise distributors selling ELSS. Higher trail commissions (often in the range of 1-1.5%) and extra toppings like sales contests (with junkets and other prizes) and heavy advertisements on promotional magazines of distributors have come on the distribution term sheets of most fund houses.
The recent tax-free bond issuance by IFCI, L&T Infra and IDFC Infra will not upset fund mobilisation by ELSS, industry sources added.
