Investing in tax planning schemes is a key priority for those who are yet to finalize their tax-related investments for the current financial year. Apart from investing in Public Provident Fund (PPF), medi-claim and term life insurance, one should consider Equity Linked Saving Schemes (ELSS) for the purpose of tax planning. Popularly known as tax-saving funds, ELSS is one of the tax saving vehicles that qualify for deduction under Section 80C.

  1. Equity Linked Savings Scheme or ELSS

Out of the entire mutual fund landscape, equity-linked savings schemes or ELSS are the only mutual funds eligible for 80C deductions. ELSS is a diversified equity mutual fund that offers tax deductions up to Rs. 1.5 lakh annually.

Prior to the introduction of Budget 2018, ELSS returns were completely tax-free. However, now it is subject to 10% long-term capital gains tax if the capital gains are over and above Rs. 1 lakh. Even after the 10% tax cut, ELSS has the potential to deliver superior returns compared to other tax-saving instruments. The perks of ELSS investments are not limited to the taxes saved. The power of compounding ensures that your investment is doubled if you invest for, say, 5 years (tenure of tax-saving FD). To add to that, the minimum lock-in period is only 3 years.


 Key takeaways from ELSS :

  • Save up to Rs 46,800 in taxes
  • Highest returns among other 80C options
  • Lowest lock-in of 3 years
  • Get Instant Investment Proof


Differentiators for ELSS

  • It allows tax exemption up to 1.5 lakh and this can save you lots of money in the long run.
  • The lock-in period for ELSS is much less when compared to fixed deposits and public provident funds, 3 years.
  • Although it comes with a slightly higher risk quotient, it offers much higher returns subject to the market.
  • Both dividends and capital gain from ELSS are tax exempt, saving you a fortune.
  • An additional benefit with ELSS is that you can start with a bare minimum amount of Rs 500 plus there is no cap on the maximum amount.


Taxing the mutual fund returns

1) Dividend option:

Any dividend received from mutual funds is tax-free. Which means if you are investing in mutual funds with dividend option the returns from such dividend income is not taxable.

2) Equity funds with Growth option

Redemption < 1 year – Short term capital gain

If you have invested in equity funds with growth option and sold/redeemed before one year period, you are liable to pay short term capital gains tax. Currently short term capital gain is 15% on the returns (4% cess additionally to be payable which would come to 15.60%).

Redemption > 1 year – Long term capital gains

If you sell or redeem your mutual funds after a 1 year period, it would fall under the long term capital gain and the returns are tax-free.

However as per the newly inserted section 112A via Finance Act 2018, if the amount of long-term Capital gain exceeds Rs 1,00,000 then the amount in excess of Rs 1,00,000 shall be chargeable to tax @ 10% without indexation(plus health and education cess and surcharge). However the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1st April 2018.

So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018. The start date of your holding remains the original purchase date.

3) Debt mutual funds with growth option

Redemption within 36 months – short term capital gains: If you are selling or redeeming your debt mutual fund before 36 months, it is short term in nature and the profits are fully taxable. Means you need to add such profits/gains to your taxable income and pay income tax based on your income tax slab.

Redemption > 36 months – Long term capital gains: If you sell your debt mutual funds after 36 months, it is termed as long term capital gain. In such case, the tax would be paid at the rate of 20% after indexation benefit.


Saving your Gains from being Taxed


  • Invest in debt funds if you have a low-risk appetite


If you have a low risk appetite, invest in debt mutual funds and take advantage of indexation. Avoid investing for less than  36 months in debt mutual funds with growth option.


  • Invest in Equity mutual funds if you are a risk taker


Though equity mutual funds are risky, invest in top-rated equity mutual funds for the long term. One side you would get capital appreciation and another side you would get tax free benefit up to a profit of Rs 1 lakh.


  • Invest in dividend options for regular income


If you are a senior citizen or looking for regular income, opting for dividend option in a mutual fund would help you to get a regular income. However, you should note that such income is not fixed. You may even get lower returns than bank fixed deposit rates in some cases.

Be informed and stay invested with Piggy!