Clarificatory Notification on ELSS (Notification 259/2005) dated 13 Dec, 2005

The CBDT has issued a clarificatory notification amending the earlier issued ‘Equity Linked Savings Scheme, 2005’.

The first part pertains to the amendment of the definition of ‘year’. A year will now refer to a year commencing from the date of allotment or holding of units (as against the earlier definition of year meaning an year commencing from 1st April)

The second part of this amendment inserts a new clause to include open-ended plans. The Unit Trust or other mutual funds can operate one open-ended equity linked saving plan, subject to the prior approval of SEBI. The intention it appears is not to restrict the equity linked saving plans to close-ended schemes only; and at the same time allow the existing open-ended schemes to continue to be operational.

Related Links:
  1. Full Text of this notification.
  2. Original postEquity Linked Saving Scheme, 2005 [Notification No 226/2005]‘.
  3. Full text of original notifiction.

Equity Linked Saving Scheme, 2005 [Notification No 226/2005]

The CBDT has vide Notification No 226/2005 dated 3rd November, 2005 notified new rules for Equity Linked Saving Schemes.

On the whole, this notification is regressive & will cause more inconvenience to the investors; rather than benefit them.

The key highlights of this scheme are:

  • Investments to be of a minimum amount of Rs.500 and in multiples of Rs.500 thereafter
This is a welcome step, since the minimum investment, either in lump-sum or through the System Investment Plan (SIP) route was Rs.5,000
  • The mutual fund to allot units not later than 31st March each year. The plan to be open for a minimum period of one month during the year 2005-06 & at least for three months in the subsequent years

This is a regression since all the ELSS’s currently available are open-ended, & hence provide the flexibility to invest and / or withdraw (reddem) at any time during the year , without being restricted to any specified time period. This also helps the investor manage his/her cash flow better, and in addition, can help time the market better
  • The mutual fund to announce the re-purchase price after one year from date of allotment & every six months thereafter for the next two years (second & third years); & subsequently the re-purchase price to be declared at a frequency of not less than one month

The currently available schemes being open-ended, give an investor the option to exit at any time based on the NAV’s declared daily. Hence, from now on the investors will face a problem due to the re-purchase price being declared only half-yearly / monthly; restricting their exit options.

  • The re-purchase price to factor in at least 50% of the unrealised gains of the plan after deducting a maximum of 5% of the average NAV as management, selling and other expenses

This causes severe concern since under the earlier regulations 100% of the unrealised appreciation was factored in the re-purchase price due the fact that NAV’s were declared on a daily basis

  • A plan can be terminated at the close of the 10th year from the year in which the allotment of units is made or, at the option of the fund, if 90% or more of the units under any plan are repurchased before completion of ten years. The outstanding units to be redeemed at the final repurchase price to be fixed by the fund

This forces the plan to be of a maximum duration of 10 years, instead of it being a open-ended plan; with the attendent benefits & pitfalls.

The following some points which need not have been specified, but nonetheless do find mention in the notification, especially since the three-year lock-in period is applicable for all investments which accrue any tax benefit to the investor:

  • Investment to be held by the investor for a minimum period of three years
  • Units issued under the plan can be transferred, assigned or pledged after three years of its issue
  • Investment to be acknowledged by certificate of investment / statement of account

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