With the Union Cabinet clearing the the new Direct Taxes Code (DTC) on Thursday, tax benefits on ELSS investments up to Rs 1 lakh are expected to go by next April. And investors looking for greener investment pastures are retreating from ELSS.

However, with the approaching tax-break sunset, there is a virtual stampede to exit ELSS schemes, despite the fact that tax benefits continue for investments made in 2010-11.  ELSS has served investors and the equity market well. For many investors, ELSS was the stepping stone to the stock market, which helped expand the equity culture.

Apart from the tax benefit, ELSS attracted investors because they were rather ‘liquid’ schemes. You could receive regular dividends throughout the lock-in period, if you opted for the dividend option.

In fact, ELSS is the only investment option under Section 80CC of Income Tax Act which provides interim cash flow during the lock-in period. Besides, while PPF, NSC and tax-free bank FD have a five-year lock-in period, ELSS is tax-free with a three-year lock-in. Mutual funds usually offer two types of ELSS: Open-ended and closed-ended.

The latest DTC paper mentions only six tax-free schemes enjoying the EEE (exempt-exempt-exempt) status. These are government provident fund, PPF, NPS, recognised PFs approved life insurance products and annuity schemes. Investments enjoying EEE status are tax-exempt during the three stages of investment, accrual and withdrawal.

DTC has also suggested that the rules for contribution and withdrawal be harmonised and made uniform so that savings are made by the taxpayer for the long term.

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