Market regulator Sebi and mutual fund houses have asked the finance ministry to continue with the tax benefits on equity linked schemes in the Direct Taxes Code, which will replace the existing Income Tax Act. The revised DTC draft, based on which the government is finalising the bill, has proposed to do away with the tax benefits available to people investing in the equity-linked savings schemes (ELSS). Under the IT Act, investments up to Rs one lakh in the ELSS and dividends accrued on them are exempted from tax. Besides, there is no long term capital gain tax on withdrawal of the funds after the three-year lock-in period. Sources said Sebi and the mutual fund industry have written to the finance ministry to continue with the current exemption, as the industry is witnessing redemption pressure post the entry-load ban, a type of agent commission that was charged from investors. During July, the industry saw Rs 139 crore withdrawal from the ELSS portfolio, and till July the redemption was to the tune Rs 349 crore. The sources said retail investors benefit from investment in ELSS and Sebi wants that ELSS schemes continue to enjoy tax deduction.
After banning the entry-load, since August 2009, this is the first time that the market regulator has sought some benefit from the finance ministry. Currently, ELSS comes under a method of taxation called EEE -- wherein it is exempted at the points of investment, in the entire tenure of the investment and as well at the time of withdrawal. The draft DTC does not include ELSS as one of the instruments which will be subject to EEE mode of taxation. Currently there are over 40 ELSS schemes in the market. During the last fiscal (2009-10), the MF industry sold ELSS units of over Rs 3,000 crore