Investors, who think they are more tolerant to market risk, want to think beyond the traditional tax-saving investments, and aim at higher returns, often park their money in Equity Linked Savings Scheme (ELSS). ELSS is a mutual fund scheme that primarily puts the investor’s money in the stock market or equity. With ELSS, your money is invested across sectors and industries. It’s often termed as the tax-saving mutual fund, eligible for a tax exemption of up to Rs1.5 lakh annually under Section 80C of the Income Tax Act, 1961. Once you invest in the scheme, you are eligible for the above-mentioned ELSS tax benefit. Of all the tax-saving instruments, ELSS offers the shortest lock-in period of only 3 years. But is the profit earned from your ELSS investment tax-free? Not anymore. Here’s a briefing on the LTCG and other taxes imposed on ELSS.
LTCG tax on ELSS funds, and how is it calculated?
If you are a taxpayer and wish to cut back on some taxes and aim to earn a relatively better higher return simultaneously, you may want to invest in tax-saving mutual funds of India. If the ELSS tax benefit gets you interested, you may consider delving deeper into it. Have you come across the term LTCG tax and wondered what it is? The profit that you earn on selling units of equity-oriented mutual funds after holding them for a period of one year or more is called long-term capital gains (LTCG). The rule that has been in effect from 1st April 2018, applies a 10% tax on any such income/profit that exceeds Rs1 lakh annually. This 10% tax that you pay on the profit you earn from investing in ELSS for a year or more is known as LTCG tax. [For ELSS funds lock-in period would be 3 years.
Suppose Arun invested Rs5 lakh in an ELSS mutual fund scheme on 3rd May 2018. On 4th June this year (2021), he redeemed all the units of the ELSS at Rs8 lakh. During the 3-year lock-in tenure, his investment generated a profit of Rs3 lakh. He will have to pay 10% LTCG tax on this profit amount after a deduction of Rs1 lakh from it, which is Rs2 lakh (Rs3 lakh – Rs1 lakh). Hence, Rs20,000 tax (10% of Rs2 lakh) will be applicable on his LTCG from his ELSS investment.
What are the other taxes applicable on ELSS?
If you invest in an ELSS mutual fund scheme, you may or may not choose to obtain a dividend from your investment. If you select the dividend payout option, you qualify to receive it if the fund declares any. You may gain a dividend even during the 3-year lock-in period. However, the dividend that you receive is tagged to your taxable income. It’s then taxed based on the tax bracket your income falls in. For example, if your income is in the30% tax bracket, you incur 30% tax on the dividends you earn from your ELSS funds as well.
Let’s wind-up
Ever since the LTCG tax on ELSS mutual funds was re-imposed by the Union Budget 2018-19, many are apprehensive about whether or not to put their money in ELSS. However, investors may still find it as one of the best tax-saving investment options that help create wealth as well. Investors in the higher income tax bracket may even save up to Rs 46,800 tax annually. It offers flexibility if you wish to change your plan or move on to a different fund. This, coupled with the brief lock-in period, also contributes to its popularity.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully
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