Equity Linked Saving Schemes (ELSS) are still better than other investment options despite the new LTCG tax. This article will discuss why ELSS funds are still better despite the new LTCG tax and how they have helped you save in the long term.
Equity-linked saving schemes are a type of investment where your investments grow at least twice as fast as the SIP rate. This is because your savings are invested in equities and bonds, which means your money is growing faster than inflation. This is because the units of equity increase with inflation, and bond prices decrease with inflation.
You get a fixed investment return every year when you invest in an ELSS fund. This means that you will still get a profit even if there is a bad year for stocks or bonds. You can withdraw money from these schemes anytime before death without levying taxes (after the lock-in period of 3 years).
LTCG is a tax paid on the profit generated by investing in an asset such as real estate, equity, or equity-dominated products (such as mutual funds) and held for a particular time frame. The long-term horizon differs from instrument to instrument.
In the union budget of 2018-19, Finance Minister Arun Jaitley reintroduced the LTCG tax on equities and equity-oriented mutual funds. Until 2018, the LTCG was exempted from taxation and was scrapped from being in force in 2004-05 by the then finance minister Mr P Chidambaram.
Equity-linked savings scheme, popularly known as ELSS, is a type of mutual fund that provides tax benefits under section 80C of the Income Tax Act 1961. The instrument comes with a three year lock-in period (the lowest amongst all other investment instruments available for investment within section 80C).
Equity-linked saving schemes (ELSS) are the best way to invest in the current bull market. These funds have seen a stellar performance over the last few years and are still among the best options for investors looking to grow their wealth.
After reintroducing the LTCG tax in the Union Budget 2018, the long-term capital gains on equities or equity-dominated funds will be taxable if the profits exceed Rs 1 lakh. The move has left the investors unnerved, and a lot of them are wondering about the suitability of the product to their profile.
Also, the LTCG applicability on ELSS has created confusion amongst the investors’ community. Many investors have started to assume that the tax benefit that ELSS used to provide has been withdrawn since it has come under the purview of LTCG tax.
Equity-linked Saving Schemes (ELSS) continue to be an equity-dominated mutual fund scheme. But, the scheme will now be taxed at 10 per cent if your gain exceeds Rs. 1 lakh in a financial year. On the tax-saving front, ELSS schemes will continue to provide you tax benefits under section 80C up to Rs 1.5 lakh yearly. Both LTCG and Income tax are different.
Assume you fall in the 25% tax slab with an income of Rs. 15 lakhs. You use ELSS as your investment under section 80C. Thus, this will enable you to save 25%, on Rs 1.5 lakhs, tax as done in the past.
Now, LTCG has been introduced. For example, assume you sell your fund and make Rs 1.2 lakhs as a profit. In such a scenario, you will be entitled to a 10% tax on the amount over Rs 1 lakh, i.e., Rs 20,000. Thus, if you look carefully, you will find that while your slab is 25%, LTCG remains at 10%.
Therefore, your LTCG tax rate and income tax slab will not move in sync. Thus, as an investor, you should not panic and continue investing in ELSS. Instead, despite implementing 10% LTCG in ELSS, we strongly recommend that it remains one of the best investment options under section 80C and comes with the lowest lock-in period.
Thus, it would be best if you did not wait for last-minute investments. Instead, with over three months remaining for your tax planning, make the most by starting your ELSS investment.
Many investors feared that the tax on long-term capital gains (LTCG) would affect their returns. However, while there are long term capital gains, ELSS still stands to be better than various other investment vehicles out there. On the other hand, ELSS funds still offer you tax exemptions – provided you make your investments before the end of this financial year.