Tax relief on in equity-linked schemes

The Central Board of Direct Taxes (CBDT) on Monday clarified that all prevailing equity-linked savings schemes, including those launched this fiscal, will be eligible for tax benefits under Section 80C of the Income Tax Act.

But a question mark remains on whether the structure of these funds will have to be altered to make them close-ended, as indicated in the earlier CBDT notification. Industry representatives are hopeful that they will be allowed to retain their funds' open-end character which facilitates any-time entry and exit for investors.

The Association of Mutual Funds of India (AMFI) had argued its case for keeping equity-linked savings schemes (ELSS) open ended and an amendment would be made to this effect soon, said AMFI Chairman AP Kurian.

He said, "We have made our submission to concerned officials and followed it up with personal discussions."

CBDT's notification last week had brought all ELSS under the purview of Section 80C, effective from the date it is published in the official gazette.

This had created confusion on whether schemes that had collected money in ELSS this fiscal so far would be eligible for tax deduction.

In this fiscal year, Kotak Mutual, Chalamandalam and Reliance Mutual Fund have launched ELSS. ABN Amro, which had launched a scheme on November 7, suspended sales in the new schemes due to the notification. Fidelity and HSBC are expected to launch their tax-planning schemes some time next month.

Since the beginning of this fiscal, about 21 ELSS have been operational, including newly launched schemes, and they have collected over Rs 1300 crore. On October 30, 2005, these schemes had total assets under management of Rs 3102 crore.

The CBDT clarification has come as a big relief for investors as well as mutual funds companies which have sold these funds pitching on potential tax benefits.

However, the CBDT notification has defined ELSS as ten-year closed-end funds, as was the case until 1998. Originally, when ELSS were introduced in the early 90's, they were allowed to be structured only as 10-year closed-end funds with a compulsory lock-in period of three years.

Subsequently, mutual funds were allowed to launch open-ended schemes with the restriction that each asset management company could run only one such scheme.

This saved mutual fund companies the trouble of launching a fund every tax-saving season while allowing investors the option of investing in such schemes through the year.