How are ELSS funds taxed What is It
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Are you aware of how your ELSS gains are taxed?
With the Equity Linked Savings Scheme (ELSS), you can put in a tax-saving joint fund and lower the amount of money you have to pay taxes on. But the money you make from investing in ELSS is taxed.
The only thing that makes ELSS different from other section 80C tax-saving tools is that the lock-in time is only three years, and at least 80% of the fund’s stock must be directed toward equity assets.
When you cash out your ELSS units, you can get capital gains. When you keep the units, you get monthly income.
This Article helps you to know more about the How are ELSS funds taxed What is It in detail.
How are ELSS funds taxed What is It
Capital Gains Tax
A stock fund is what ELSS is. Short-term capital gains are gains from cashing out stock funds within 12 months, according to the present rules. This is different from Long Term Capital Gains (LTCG), which are gains made on units after they are sold after 12 months.
ELSS capital gains are long-term capital gains because you can’t cash out your units before 36 months. For ELSS funds, this means that capital gains over Rs. 1 lakh in a financial year are taxed at 10%. But keep in mind that this Rs.1 lakh cap will take into account all of your equity purchases, like stocks and equity mutual funds.
Investing in lump sum
It’s easy to figure out the capital gains tax on a one-time purchase because it’s easy to keep track of how long the investment was held.
Let’s look at an example.
Let’s say Amal put 5 lakh rupees into an ELSS fund on April 3, 2018. It was bought back on June 4, 2021, for Rs 7 lakh. If the fund had given an 8% return over the last three years, he made more than Rs. 2 lakh during the three years that he kept the money in it.
After taking out Rs1 lakh, he now has to pay 10% LTCG tax on the capital gains, which comes to Rs.1 lakh (Rs2 lakh – Rs1 lakh). So, the LTCG tax he has to pay on his ELSS investment is 10% of Rs.1 lakh, or Rs.10,000.
Investing in SIP
Putting away a set amount of money every month through SIP can help you organize your investments in a way that saves you money on taxes, so you don’t have to worry about it at the last minute.
It might be hard to figure out the capital gains on SIP purchases, though, since each payment is locked for three years. And if you start putting money into an ELSS fund through SIP in January 2022, the units you were given in January 2022 will not be able to be sold until January 2025.
Let’s say Amal put Rs. 12,500 into an ELSS through a SIP every month from April 2018 to January 2022. He can only get back the units he put in before February 2019 if he wants to cash them in now.
Based on the profits each SIP payment earns, the fund house will figure out the correct tax rate for each installment’s benefits. Based on the Net Asset Value (NAV), which is used to process both the SIP purchase and leave, the fund house would figure out the returns.
In other words, the NAV went from Rs. 10 in April 2018 to Rs. 40. Then you would have made Rs. 37,500 from the first payment.
Setting up SIPs and NAV units Value at exit (NAV) of the units What You Get
12,500 10 1250 i.e. (12,500/10) 40 50000 i.e.(1250*40) ₹37,500, which is the value of the pieces.
The fund house would figure out the gains the same way for each payment until February 2019.
This was all about taxes on gains from investing in ELSS. Now let’s look at how the government would tax income from dividends.
People who put money into an ELSS mutual fund plan can choose to get a payout or not. If you choose to receive income instead of taking out capital, you will be able to get a payout if the fund releases one. During the 3-year lock-in time, you can also earn profits. The profit you get, on the other hand, is taxed as income. It is then charged based on the tax band your pay falls in. Say you make $30,000 a year. The returns you get from your ELSS funds will also be taxed at 30% if your income is in that range.
In conclusion
ELSS is a great way to save on taxes, especially if you plan to keep the money saved for a long time. That being said, you should know how to pay capital gains and monthly income from an ELSS, though. You can talk to us to find out more.
The only reason for this blog is to teach, so don’t take it as personal advice. If you buy in a mutual fund, there are market risks. Carefully read all papers linked to the fund. This is the brief information about the How are ELSS funds taxed What is It in detail.
