ELSS funds invest a majority of your money into equity and have a 3-year lock-in period. LTCG (Long Term Capital Gains) is applicable on ELSS (Equity Linked Savings Scheme) funds after 1st April 2018. You will have to pay a 10% LTCG tax on your gains above Rs 1 lakh at the time of redemption without any indexation benefit.
What is ELSS?
ELSS or ‘Equity Linked Savings Scheme’ is a type of mutual fund where you get the benefit of tax deductions as well as higher returns. An ELSS fund is an excellent option for individuals who want to invest in equity and save taxes. ELSS allows you to claim up to Rs 1.5 lakh per year under Section 80C.
Moreover, you get better returns than any other debt securities like PPF (Public Provident Fund), NPS (National Pension Scheme), FDs, etc. ELSS funds allocate more than 65% of your funds into equity (listed shares) which in return provide better returns. There is a lock-in period of 3 years which is also low when compared to PPF and NPS. Here you also get to swap your fund if you are unhappy with its performance.
Is LTCG applicable on ELSS?
Now that you know the benefits of investing in an ELSS, the next question that enters your mind must be, are the gains taxable?
The answer is Yes. From 1st April 2018, LTCG (Long Term Capital Gains) on any ELSS funds would be taxable to the tune of 10% above Rs 1 lakh, without any indexation benefit. This means you will now have to pay a 10% LTCG tax on your gains over Rs 1 lakh at the time of redemption.
This might upset investors as other sovereign investment avenues such as the PPF and NPS fall under ‘EEE’ (Exempt-Exempt-Exempt) category. There are no taxes on the interest as well as the principal at the time of redemption.
On the other hand ELSS funds provide better returns than the fixed interest instruments which return 7-8% on average. As ELSS is linked with direct equity the returns are not fixed but the historic returns have invariably been of double digits. Therefore, the 10% tax could be compensated with a higher return on an ELSS. With this, you can achieve two objectives including saving taxes as well as generating wealth.
To get the best out of both worlds, you can split your tax savings investments into both PPF as well as ELSS to get better returns and to save more capital gains taxes.