Long Term Capital Gain Tax on ELSS

Equity Linked Savings Schemes or ELSS have become a go-to option for investors looking to achieve the highly sought-after dual benefits of capital growth and tax savings. In short, these mutual funds are a right blend of investments in equity and related instruments, having the potential to deliver relatively higher returns compared to other options which come on the list of tax savings. With a mandatory lock-in period of three years, ELSS funds are more of a medium to long-term investment. However, while ELSS can significantly boost your portfolio it is key to learn about the tax implications, particularly the long term capital gain tax on ELSS that applies to the profits you earn upon selling your units after the lock-in period.

The long term capital gain tax on ELSS mutual funds is an integral aspect that you must consider before investing. According to the currently prevalent taxation rules, any gains from ELSS investments above Rs. 1.25 lakhs in a financial year will have a 12.5% tax applied without indexation. This means that if your total gains from ELSS investments go over Rs. 1 lakh, you have to pay 12.5% ELSS capital gain tax on the excess amount over and above Rs. 1.25 lakh.
 

For instance, assume that you invest Rs. 2 lakh in an ELSS fund and the value of your investment becomes Rs. 3.5 lakh after the end of the mandatory three-year lock-in period. Here, your total gain will be Rs. 1.5 lakh. Out of that, Rs. 1.25 lakh is exempt from ELSS long term capital gain tax, leaving the remaining Rs. 25,000 as the taxable amount. Hence, you will have to pay 12.5% of Rs. 25,000 or Rs. 3125 as the long term capital gain tax on ELSS.
 

It is also important to note that the Rs. 1.25 lakh exemption is on a per financial year basis so you can plan your redemptions strategically. Divide your ELSS redemptions over different financial years, and this exemption would be maximised, thereby reducing or completely eliminating your ELSS long term capital gain tax liability. For example, if you have Rs. 2 lakh in gains, you could redeem Rs. 1 lakh in one financial year and the remaining Rs. 1 lakh in the next year hence avoiding any LTCG tax.

• There is an applicable ELSS capital gain tax for profits from ELSS above Rs. 1.25 lakhs per financial year are taxed at 12.5% without indexation.

• If your gain exceeds Rs. 1.25 lakhs, only the excess amount is taxed as per the norms. For a Rs. 1.5 lakh gain, only Rs. 25,000 is taxable.

• To minimise tax liabilities, spread your redemptions over different financial years to use the Rs. 1.25 lakh exemption fully each year.

• ELSS funds have a mandatory three-year lock-in impacting when you can redeem and realise your gains.

• Each SIP installment is treated as a separate investment so the gains and taxation must be calculated individually.

• Consider your overall tax situation when redeeming ELSS to optimise your tax impact. Ensure accurate reporting of LTCG in your tax returns to comply with regulations.

Calculating your long term capital gain tax on ELSS is a key aspect of financial planning for those looking to optimise their tax liabilities. In this regard, here is a simple guide to help you navigate the process further:
 

Firstly, you need to calculate the total gains from your investment in ELSS. This is done by deducting the amount of the initial investment from the redemption value. For example, if you have invested Rs. 3 lakh in an ELSS fund, then after the mandatory lock-in period your investment grows to Rs. 4.5 lakh. So, your total gain in this case will be Rs. 1.5 lakh.
 

After calculating your total gains, you have to apply for the Rs. 1.25 lakh exemption on your long term capital gain tax on ELSS. According to the existing tax laws, the first Rs. 1.25 lakhs of ELSS long term capital gain tax is exempt from taxation. In our example, out of the Rs. 1.5 lakh gain, Rs. 1.25 lakh is exempt from tax, leaving Rs. 25,000 as the taxable amount. You apply the tax rate of 12.5% for LTCG on this amount. So this Rs. 25,000 profit would attract tax liabilities of Rs. 3,125.
 

Moreover, it is important to note that this exemption can be utilised once each financial year. So if your gains are spread across multiple years, you can take full advantage of this by timing your redemptions. So if your total gains amount to Rs. 2 lakh, you could redeem Rs. 1 lakh in one financial year and the remaining Rs. 1 lakh in the next financial year. By doing this, you could effectively avoid paying any ELSS capital gain tax.
 

In the case of investments in ELSS through SIPs it gets a bit more complex. Each instalment of a SIP is treated as a separate investment with its three years of lock-in period. So when you want to redeem your units, you would need to calculate the long term capital gains on every such installment based on its purchase date, and the NAV at that point in time.
 

Aside from the numbers, in case you expect to have huge capital gains from other investments in a financial year, it may be advisable to wait and redeem ELSS in another year when you are likely to be at a lower tax bracket. On the other hand, if you expect your taxable income to be low in a given year, then it will be advisable to realise gains from your ELSS investments during that year itself.

ELSS funds are a compelling choice for investors aiming to combine tax savings with wealth creation. While the ELSS long term capital gain tax gains can affect your returns, knowing the tax rules and planning your redemptions wisely can help you maximise the benefits. By carefully considering your financial goals, tax situation, and market conditions, you can effectively use ELSS funds to enhance your investment portfolio while optimising your tax liability. For more information on managing your investments, consider investing in mutual funds and compare mutual funds. Use a Mutual Fund Calculator to plan your investments effectively. Learn more about Long Term Capital Gain Tax for better tax planning and access over 1000 mutual fund schemes on the easy to use Bajaj Finserv platform. Above all, consult with a financial advisor to tailor your investment strategy to your unique needs and circumstances.