Does ELSS Come Under the New Tax Regime? A Complete Guide

The Equity-Linked Savings Scheme (ELSS) is a popular tax-saving investment under Section 80C of the Income Tax Act in India. It offers taxpayers a chance to reduce their taxable income while investing in equities, with the added benefit of capital appreciation. But, when it comes to filing your income tax returns, the question arises: Does ELSS qualify under the new tax regime?

In this blog, we will help you understand the key differences between the old and new tax regimes, how ELSS fits into these regimes, and how to make an informed decision about your tax planning.

What Is the New Tax Regime?

The new tax regime introduced in FY 2020-21 (Assessment Year 2021-22) by the Government of India provides taxpayers with the option of paying taxes at lower rates. However, to avail of these reduced rates, taxpayers must forgo several deductions and exemptions, including those under Section 80C, which includes tax-saving investments like ELSS, PPF, and National Savings Certificates (NSC).

Under the new tax regime, the government offers taxpayers the following income tax slabs:

Income Range	Tax Rate
₹0 - ₹2.5 Lakh	Nil
₹2.5 Lakh - ₹5 Lakh	5%
₹5 Lakh - ₹10 Lakh	20%
Above ₹10 Lakh	30%

This means that if you choose the new tax regime, you’ll benefit from lower tax rates, but you cannot claim deductions like those for ELSS investments, home loan interest, or other tax-saving instruments.

What Is ELSS?

ELSS (Equity-Linked Savings Scheme) is a type of mutual fund that invests primarily in stocks or equities. The key benefits of ELSS include:

• Tax Deduction: Investments in ELSS are eligible for tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961.

• Short Lock-in Period: The lock-in period for ELSS is 3 years, which is the shortest among all tax-saving instruments under Section 80C.

• Potential for High Returns: Since ELSS invests in equities, there’s a potential for high returns over the long term, although market risks are also involved.

Does ELSS Come Under the New Tax Regime?

Key Differences Between the Old and New Tax Regime:

Feature	Old Tax Regime	New Tax Regime
Tax Slabs	Higher tax rates with deductions	Lower tax rates without deductions
Deductions Available	Deductions under Section 80C, 80D, etc.	No deductions, including ELSS
Taxable Income	Can reduce taxable income with ELSS and other deductions	Taxable income is taxed at lower rates, but no deductions allowed

Impact of the New Tax Regime on ELSS

• Old Tax Regime: If you opt for the old tax regime, you can claim a deduction of up to ₹1.5 lakh under Section 80C for your ELSS investments. In addition to ELSS, other instruments like PPF, NPS, and tax-saving FDs also fall under Section 80C and offer deductions.

• New Tax Regime: If you opt for the new tax regime, you cannot claim the deduction for your ELSS investments. The new tax regime does not allow you to claim any deductions under Section 80C. However, you still enjoy the benefit of lower tax rates under this regime.

Therefore, if you want to claim a tax deduction on ELSS, you will have to opt for the old tax regime.

Which Tax Regime Should You Choose for ELSS?

The decision to choose between the old and new tax regime depends on your income level, investment plans, and tax-saving preferences. Here’s a simple breakdown of factors to consider when deciding:

• Old Tax Regime: Choose the old tax regime if:

  • You have significant tax-saving investments under Section 80C, such as ELSS, PPF, NPS, etc.

  • You want to maximize your tax deductions and save more on your tax bill.

  • You prefer tax planning and are comfortable keeping track of your eligible deductions.

• New Tax Regime: Choose the new tax regime if:

  • Your total tax-saving deductions (including ELSS) are minimal, and you benefit more from lower tax rates.

  • You do not have many investment plans in tax-saving instruments, or your deductions under Section 80C are relatively low.

  • You prefer simplicity and lower paperwork, as the new tax regime eliminates the need for claiming deductions.

How to Make the Right Choice?

To make an informed decision between the old and new tax regimes, calculate your total tax liability under both regimes, factoring in your income, eligible deductions (like ELSS, home loan interest, insurance, etc.), and the applicable tax rates.

Here’s a quick comparison:

• If your taxable income is around ₹10 lakh and you have ₹1.5 lakh invested in ELSS (Section 80C deduction), opting for the old tax regime might save you more in taxes, as you can claim the deduction and reduce your taxable income.

• On the other hand, if your taxable income is ₹10 lakh and you do not have significant tax-saving investments, choosing the new tax regime could be beneficial, as the lower tax rates could result in a reduced tax liability even without claiming deductions.

Conclusion

The decision between the old and new tax regimes is highly personal and depends on your individual financial situation. If you are looking to maximize tax-saving benefits through deductions like ELSS investments, the old tax regime is your best option. However, if you prefer lower tax rates and don’t have enough deductions, the new tax regime could be a more attractive choice.

Ultimately, if your goal is to claim deductions on ELSS investments, the old tax regime is the way to go. Keep in mind that you can switch between the two tax regimes in future years, so review your financial situation each year before making the decision.

For accurate tax planning, it's always recommended to consult a tax professional who can help you evaluate which tax regime best suits your financial goals.

FAQs

1. Can I claim deductions for both ELSS and other investments in the new tax regime? No, the new tax regime does not allow any deductions under Section 80C, including ELSS. You will need to opt for the old tax regime if you wish to claim such deductions.

2. Can I switch between the old and new tax regime every year? Yes, you can switch between the two regimes every financial year, except for business income. However, once you choose a regime for a financial year, you cannot change it for that year.

3. What are the benefits of ELSS in the old tax regime? ELSS offers a tax deduction of up to ₹1.5 lakh under Section 80C, and the investment is subject to a 3-year lock-in period, making it one of the most popular tax-saving instruments.

By understanding how ELSS fits into the new tax regime, you can make an informed decision about your tax planning strategy. Whether you're aiming for tax deductions or seeking lower tax rates, the right choice can help you save significantly on your taxes.