Is LTCG Applicable to ELSS?

Among all the tax-saving investment options, there is only one fund type available under the mutual funds' category, and it is known as equity linked saving scheme or ELSS. There are several merits of ELSS – high returns, tax saving up to Rs. 1.5 lakh, systematic investment mode of investment, and shortest lock-in period.Investors typically invest in ELSS, thinking that it is tax-free. However, with the re-introduction of LTCG, the long term returns would be taxed in accordance with the SEBI mutual fund regulation.

As per the SEBI regulation, if an investor holds any mutual fund scheme for more than a year, it is categorised as Long Term Capital Gains or LTCG. Similarly, being locked in the ELSS scheme means the returns are treated as LTCG. There is a tax exemption for investors if the long-term capital gains are up to Rs. 1 lakh. On the other hand, if the profits are more than Rs 1 lakh, the LTCG tax rate of 10% is applicable.

• If an investor sells shares post April 2018, he/she is liable to pay 10% of tax if the long term capital gains exceed Rs. 1 lakh.
• On the other hand, if an investor has held the shares for more than a year and sells it before March 2018, the long term gains will be tax-exempt.

Mr. Nakul Gupta invested Rs. 2 lakh in an equity fund on 1st June 2015 at a Net Asset Value of Rs.40. He purchases 5000 fund units. He decides to redeem the units on 1st May 2019. Since Mr. Nakul holds the units for over a year, the returns will be considered long-term gains.

NAV on 31st Jan 2018 is Rs. 55. Thus, the investment amount is Rs.55*5000 = Rs. 2.75 lakh.NAV on 1st May 2019 is Rs.85. Here, Nakul's investment amount increases to Rs. 4.25 lakh. The value of capital gains to be considered for taxation would Rs.1.5 lakh. Out of this amount, Nakul is eligible for tax exemption up to Rs. 1 lakh; therefore, the rest amount, i.e., Rs. 50,000 would be taxed at a rate of 10%. The amount would be Rs.5000.The effect of LTCG on ELSS mutual funds is clearly seen in the behavior of the investors. Investors are skeptical about whether it is better to consider the equity scheme for tax saving or not. Due to this, many are considering investment options other than ELSS.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.