Equity Linked Saving Schemes or ELSSs will not offer tax-free returns anymore. If the budget proposal to introduce tax of 10 per cent on long term capital gains of over Rs 1 lakh goes through, even these tax saving mutual funds would attract LTCG tax of 10 per cent on redemption. Should investors continue to bank on these schemes to save taxes or do they have better alternatives?

ELSS Funds or tax saving mutual funds qualify for tax deduction under Section 80C of the Income Tax Act.

One can invest in ELSSs and claim a maximum tax deduction of up to Rs 1.5 lakh in a financial year. However, many investors were attracted to ELSS mainly because the returns from them were tax-free after the lock-in period of three years. That tax-free status is going to change soon.

According to mutual fund advisors, even though the long term capital gains tax is a negative for ELSS, investors should avoid any knee-jerk reactions. They remind investors that ELSS continue to have the shortest lock-in period among various tax-saving investment options available under Section 80C basket.

"With the Grandfathering of existing gains till Jan 31, existing investors have nothing much to be vexed about. For all new investors, the levy of 10% LTCG will be applicable only for gains above Rs 1 lakh. And, if you consider the long term return potential of equities, this asset class still can deliver double digit returns post tax, superior to most other options. I continue to reiterate that ELSS remains the best investment option for long term investors looking for sensible risk adjusted returns with tax-saving benefits

They also have the potential to offer superior post-tax returns than other options available under Section 80C. ELSS category has the potential to offer double-digit after returns over a long period, whereas most of the safest options available under Seciton 80C mostly offers single-digit returns.

ELSS category offered 12.90 per cent returns in the last three years, 19.19 per cent in the last five years.