LTCG Tax Calculation for ELSS Mutual Funds

03 September 2024
2 min read
LTCG Tax Calculation for ELSS Mutual Funds
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Equity Linked Savings Scheme (ELSS) is a special type of equity mutual fund scheme which primarily invests in equities and equity-oriented securities.

Since it comes with a lock-in period of 3 years, the gains under this scheme are always long-term. Here in this blog, let us explore taxability on ELSS and the calculation of tax on ELSS. 

ELSS Tax Implications

The Equity Linked Saving Scheme (ELSS) is the only investment option that offers both tax deduction and wealth creation in a combined way. It predominantly invests in equities or equity-oriented securities, with a small proportion allocated to debt.

ELSS comes with a special type of tax benefit, allowing investors to claim a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. This enables them to save a maximum of up to ₹46,800 on taxes.

However, please note that it has a 3-year lock-in period, meaning investors will not be able to redeem their investments before three years from the date of investment. Therefore, the capital gains generated from an ELSS fund always fall under Long Term Capital Gains (LTCG).

As per the recent announcement in Budget 2024, the LTCG exemption amount has been increased from ₹1 lakh to ₹1.25 lakh. Moreover, the LTCG tax rate was also revised from 10% to 12.5%.

Calculation of Tax on ELSS

Now let us understand the calculation of tax on ELSS schemes with the help of an example-

A salaried individual has invested ₹5 lakh in an ELSS scheme in FY 24-25. As it has a 3-year lock-in period, the individual plans to redeem the investment in FY 27-28. Let us assume the sell price of the ELSS investment as ₹7 lakh, resulting in ₹2 lakh LTCG.

Now the assessment year for FY 24-25 would be AY 25-26, in which she will become eligible to claim a deduction on her gross income. 

Particulars 

Amount (₹)

Gross Total Income

8,00,000

Less: Deduction under Section 80C

(1,50,000)

Net Taxable Income

6,50,000

After 3 years from the date of investment, i.e., on FY 27-28, this individual plans to redeem the investment at a sell price of ₹7 lakh, resulting in an LTCG of ₹2 lakhs.

Now, as per LTCG exemption norms, ₹1.25 lakhs will be subtracted from the LTCG amount, i.e., ₹2 lakh. Therefore, on ₹75,000 she will have to pay 12.5% capital gain tax which comes to ₹9,375 (12.5% of 75,000).

The Bottom Line

In conclusion, the calculation of tax on ELSS might seem confusing at first, but you will eventually gain clarity. ELSS is one of the best investment options available in the market, offering a combination of capital appreciation and tax benefits.

Understanding the tax implications of ELSS can help in optimising tax liabilities while still benefiting from the potential high returns of equity-linked instruments.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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