How are LTCG and other tax calculated for ELSS funds?

Investors also have the dividend option in ELSS, where he/she receive dividends even during the lock-in period.

A majority of investors now consider mutual funds as one of the best investment options. MFs are seen to give higher returns than fixed investments options. Additionally, tax experts say most people look at MFs for tax benefits. Investments in MFs help reduce one’s tax liability and the money invested grows over the long term.

ELSS is one of such mutual fund schemes under which savings are invested in equity markets. ELSS is a diversified equity mutual fund, usually looked at by investors to save tax while investing in this fund.

An equity-linked saving scheme or ELSS is a popular tax-saving mutual fund that invests a minimum of 65 per cent of the fund’s assets in the stock market. Investments under equity-linked savings schemes are diversified and invested across sectors and industries, unlike other fund options such as sector funds, financial services, and infrastructure.

ELSS investment qualifies for a tax deduction of a maximum of Rs 1.5 lakh per annum under Section 80C of the IT Act. ELSS also comes with the shortest lock-in period of 3 years as compared to other tax-saving investments under Section 80C.

On selling equity and equity-related instruments after a holding period of more than one year, investors incur an LTCG (long-term capital gains) tax of 10 per cent on capital gains above Rs 1 lakh without the indexation benefit. However, investors incur LTCG tax on capital gains above Rs 1 lakh from ELSS only after the 3 year lock-in period.

Is there any other tax for ELSS?

Investors also have the dividend option in ELSS, where he/she receive dividends even during the lock-in period. It is added to the investor’s taxable income and taxed according to his/her income tax bracket.

For instance, if one is in the 30 per cent tax bracket, he/she will have to pay 30 per cent tax on dividends. However, experts say the growth option of ELSS is tax-efficient as capital gains above Rs 1 lakh are taxed at only 10 per cent.