INDIA BUSINESS WORLD - NOVEMBER 2005
THE MONTH THAT WAS

Over five lakh investors, who have put money in equity-linked savings schemes (ELSS) launched by mutual funds since the start of this fiscal (April 1) up to November 2, 2005, can relax. These investors will be able to claim a deduction up to the maximum amount of Rs 1 lakh from their taxable income in 2005-06. The CBDT, which notified the ELSS, 2005, is set to issue a clarification stating that investments made in ELSS would qualify for tax breaks under the newly introduced provision (Section 80 C) of the I-T Act.
The recent ELSS notification had triggered off panic among investors and also in the MF industry. Fears were expressed about whether investments made so far this fiscal in such schemes could be eligible for the tax break.

According to officials, all investments made in ELSS would indeed qualify for the tax benefit under Section 80 C. Since the start of this fiscal, Reliance MF, Kotak MF and Chola MF had launched their ELSS. Collectively, they had raised close to Rs 1,200 crore in these schemes spread over 5.5 lakh investors. The ELSS of Reliance MF alone attracted Rs 670 crore with over three lakh investors. The changes notified by the government under the ELSS, 2005 would not impact these schemes. Investment in the ELSS of existing schemes would also not be impacted, said officials.

ELSS was first introduced in 1992 with the aim of attracting individuals to invest in the stock markets. The government at that time provided a tax incentive to investors for doing so, provided investors stayed locked in for at least three years. Till fiscal 2004-05, a maximum investment of Rs 10,000 in ELSS qualified for a tax rebate under Section 88 of the I-T Act.

The cap of Rs 10,000 was removed in this year's Budget when Section 88 was scrapped and replaced with Section 80 C. Investors can now claim a tax deduction up to Rs 1 lakh on investments made in designated instruments including the ELSS. They also have the flexibility to invest up to Rs 1 lakh in ELSS and claim a tax deduction on the entire amount.

ELSS launched by MFs after November 3, this year will qualify for the tax break if the plan is in accordance with the new scheme notified by the CBDT. "The ELSS, 2005 is identical to the ELSS, 1992 notified by the department of economic affairs. Since a new scheme cannot be notified from a retrospective date, the CBDT plans to make it clear that the tax benefit will be available for schemes launched by MFs up to November 2, 2005," said a finance ministry official. However, in 1998, after an amendment MFs were allowed to launch open-ended schemes which qualified for the tax benefit.

The ELSS, 2005 says that a plan operated by a unit trust or an MF would be terminated at the close of the 10th year in which allotment of the units is made under the plan. If 90% or more of the units under any plan are repurchased before the end of the completion of 10 years, the unit trust or MF may at their discretion terminate that plan even before the stipulated period of 10 years and redeem the outstanding units at the final repurchase price to be fixed by them.

According to Dhirendra Kumar of Value Research which tracks mutual funds, investors who had put money in such schemes this fiscal could feel short changed, unless the ambiguity in the notification is plugged. The money invested this fiscal by over five lakh investors was that of individual investors and not institutional funds, he said while pointing out there seemed a violation of the spirit of the Budget changes in Section 80 C. "We are willing to correct anomalies, if any. There is no intention to deprive the investor of tax benefit," said an official.

Given the confusion surrounding the notification, the Association of Mutual Funds of India was at work today to firm up its case before the CBDT. What the MF industry wants to know is whether the existing schemes can continue to operate as openended funds to qualify for the tax benefit and whether the schemes to be launched have to be mandatorily close ended.