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.
