Tax on ELSS Mutual Funds: Calculation, ELSS Taxation & Capital Gain Tax

If you have been investing in Equity Linked Savings Schemes (ELSS) for more than three years, your units would be available for redemption. Your investments may have saved tax on ELSS mutual funds, but their redemption is not tax-free.

After the Budget 2024 proposals, Long-Term Capital Gain (LTCG) tax on redemption of equity funds has changed, as has the threshold. Income tax on ELSS mutual funds now attract 12.5% in LTCG, instead of 10%. However, the good news is that the exemption limit has increased by Rs. 25,000 from Rs. 1 lakh per annum.

In view of these amendments, let’s explore ELSS taxation so you can plan your redemption wisely.

Payable tax on ELSS mutual funds during redemption

While ELSS helps you save tax at the time of investment, it’s equally important to understand how taxation applies when you redeem your units.

As per the Income Tax Act, gains from equity-oriented investments held for more than one year are considered Long-Term Capital Gains (LTCG). Because ELSS invests primarily in stocks and you can only redeem after three years, all the profits naturally qualify as long-term.

According to the Finance (No. 2) Act, 2024,

• LTCG on equity-oriented assets, including ELSS, is now taxed at a uniform rate of 12.5% for transfers made on or after 23 July 2024.
• The benefit of indexation does not apply, meaning the gains are taxed without adjusting for inflation.
• For transfers before 23 July 2024, the previous rate of 10% (on gains above Rs. 1 lakh) applied.

Let’s understand this with an example.

Calculation of capital gain tax on ELSS

Suppose you invest Rs. 3 lakh in an ELSS in FY 2024-25. Fast forward three years, and your investment has grown to Rs. 4.5 lakh in FY 2027-28.

Here’s how the calculation of tax on ELSS mutual funds works:

How to plan ELSS mutual fund redemption smartly

Here’s where ELSS gives you room to be strategic. Since the Rs. 1.25 lakh exemption is yearly, you can plan redemptions in phases. For instance, if you have Rs. 2 lakh in gains, redeem Rs. 1 lakh this year and Rs. 1 lakh next year. This way, you might not have to pay any ELSS capital gain tax.

Important points to note

To plan your ELSS redemptions smartly, you must understand a few key points about how LTCG is calculated and taxed.

• The exemption limit of Rs. 1.25 lakh applies to the total LTCG across all equity-oriented assets, not per asset. Therefore, if you have gains from multiple ELSS investments, the combined LTCG exceeding Rs. 1.25 lakh in a financial year will be subject to tax.
• If you invest through SIPs, remember that each installment has its own 3-year lock-in. So, your gains and their taxation are calculated individually.
• A 4% health and education cess is applicable on the tax amount.

Conclusion

ELSS funds not only help you save tax but also grow your wealth over time. The key is to plan your withdrawals smartly so you minimize tax on ELSS mutual funds and make the most of your returns. Start investing in ELSS today with Tata Capital Moneyfy website or Moneyfy app to explore funds, try smart calculators, and begin your investment journey today.