The year 2018 shall be remembered for days to come for several reasons.
One reason is the re-introduction of long-term capital gains (LTCG) tax. Before we delve more in-depth in, let us quickly touch upon LTCG for the sake of our novice readers.
LTCG is a tax that is paid on the profit that is 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.
Long-term horizon differs from instrument to instrument. Finance Minister Arun Jaitley in his Union Budget speech 2018-19 reintroduced LTCG tax on equities and equity oriented mutual funds.
Until now, the LTCG was exempted from taxation and was scrapped from being in force in 2004-05 by the then finance minister Mr. P Chidambaram.
Re-introduction of LTCG has impacted the last minuted investments in Equity Linked Savings Scheme (ELSS).
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 three year lock-in period (lowest amongst all other investment instruments available for investment within section 80C). Click here to see some of the best ELSS funds to invest.
Typically, taxpayers finalize their tax planning between January to March every year – the quarter is often regarded as tax saving season.
This approach has resulted in strong inflows in the ELSS category mainly because of its lowest lock-in period, and highest returns offered compared to any other instrument in the same 80C category.
However, in the current year, a similar trend is not witnessed yet. Tax experts highlighted that investors are worried and confused about the LTCG applicability on ELSS schemes and this has resulted in low investment saving inflows in the market for the same.
After the re-introduction of 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. As per the announcement, the LTCG tax is fixed at 10% without any indexation benefit.
The move has left the investors unnerved, and a lot of them are wondering on the suitability of the product to their profile.
Also, with 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 Many investors have started to assume that the tax benefit that ELSS used to provide has been withdrawn since it has come under the purview of LTCG tax.
The confusion among retail investors has resulted in low last-minute investments that had become a standard norm for a couple of years now.
So, what is the reality? As an investor, you must be wondering about this fact and would have numerous questions which are listed below:
1. Is your ELSS taxable? If yes, how much is the tax?
2. Is your ELSS not a good investment anymore?
3. Is your ELSS devoid of any tax-benefits?
Amidst this, let us clarify your doubts on taxation and ELSS.
ELSS continues to be an equity dominated mutual fund scheme.
But, the scheme will now be taxed at 10 percent 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.
Let’s take an example
Assume you fall in the 30% 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 30%, on Rs 1.5 lakhs, tax as done in the past.
Now LTCG is introduced.
Assume, you sell your fund, and you make Rs 1.2 lakhs as 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 see carefully, you will find that while your slab is 30%, 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 with your investments in ELSS.
We strongly recommend that despite the implementation of 10% LTCG in ELSS, it remains one of the best investment options under section 80C and comes with lowest lock-in period currently.
Thus, you should not wait for last minute investments. With over three months are remaining for your tax planning, make the most by starting your ELSS investment.
Following are some of the best ELSS funds that you could consider investing in:
For more questions, feel free to connect with us. Until then,
Invest Karo, Tax Bachao.
Disclaimer: The views expressed in this post are that of the author and not those of Groww