Budget Expectations: ELSS MF investments should not be restricted to multiples of Rs 500, says AMFI

After five years, India once again awaits the presentation of a full-year Budget in the second half of the year, following a Vote on Account in February. Expectations are high - once again - that the upcoming Budget will introduce several changes aimed at promoting growth and prosperity for both the economy and the common man. Many experts and analysts have laid out their wishlists in the run-up to the much-anticipated event. Among its long list of suggestions, industry body Association of Mutual Funds in India (AMFI) has suggested that Equity Linked Savings Scheme (ELSS) rules be amended to permit any amount to be invested in the scheme, instead of in multiples of Rs 500. 

According to AMFI, the proposed modification will help in “mitigating the hardship to investors and mutual funds. It is also pertinent to mention here that there would not be any revenue loss by the introduction of the proposed amendment.”

Currently, ELSS norms mandate that the amount to be invested in a mutual fund ELSS can only be in multiples of Rs 500, with a minimum of Rs 500. This is in contrast to other types of mutual fund schemes wherein investors can park their funds in any amount subject to a predetermined minimum amount. 

“Many investors choose to invest in ELSS by availing the ‘inter-scheme switch’ facility available in mutual funds i.e., switching their investment from other mutual fund scheme/s to an ELSS fund. In such cases, investors invariably choose to switch-over or reinvest the entire amount of redemption proceeds from other mutual fund schemes to ELSS, which may not be in multiples of Rs 500,” the MF industry body pointed out. 

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It is due to the very requirement of the investment to be made in multiples of Rs 500 under ELSS that fund houses are compelled to reject applications wherein the amount to be invested is not in multiples of Rs 500 or have to make partial refunds of fractional amounts not in multiples of Rs 500. “This results in avoidable inconvenience to the investor, including the loss of investment opportunity / loss of income tax benefits, apart from additional operational work for mutual funds,” AMFI explained in its list of proposals. 

In today’s digital era, the payment for mutual fund investments takes place via electronic modes, with the requirement of multiples of Rs 500 having lost its relevance.

ELSS was originally notified in 1992, by providing tax rebate under Section 88 of the Income Tax Act, 1961, for investments in ELSS floated by Unit Trust of India and other mutual funds. In that era, ELSS applications were typically collected by ‘Bankers to the Issue’ and investors were allowed to make their subscriptions in cash at the designated bank branches. 

Rule 3 - which defines the amount to be invested in ELSS – facilitated the acceptance of subscriptions in cash and reconciliations. 

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“Even if the initial contribution is made in multiples of Rs 500, the market value / redemption value of the investment would typically be an odd amount (including a few paise) and never be a round amount. In short, the aforesaid requirement of multiples of Rs 500 has no relevance in today’s digital payment ecosystem,” added AMFI, a nodal association of mutual funds across the country.