A complete guide on understanding the relationship between LTCG and ELSS

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When you are looking for ways to save on taxes, an investment option that might come to your mind would be equity-linked saving schemes. By investing in ELSS, you get tax benefits at both ends – you save tax when you invest in ELSS and pay lower taxes on gains. 

Now, let’s take a closer look at how ELSS funds and long term capital gains are connected.

Understanding long term capital gains tax

LTCG tax refers to the tax levied on profits from the sale of assets held for over 12 months. LTCG tax in India is charged at 20% with indexation benefits. Indexation means adjusting the cost of acquisition for inflation. The LTCG tax can significantly reduce your investment returns, so it is prudent to understand how you can minimise it.

You can also offset LTCG with capital losses. If you have incurred short-term capital losses for the sale of assets within 12 months or long-term capital losses, you can adjust them against the LTCG earned and lower your tax liability.

What are ELSS funds?

ELSS funds refer to tax-saving long-term mutual fund schemes that allow you to claim a tax deduction under section 80C of the Income Tax Act of up to Rs 1.5 lakh in a year. Investments in ELSS have a mandatory 3-year lock-in period, after which you are free to redeem your units at the prevailing NAV. Any gains over Rs 1 lakh from selling ELSS units after 3 years qualify for LTCG tax.

How ELSS helps reduce ETCG tax?

ELSS funds helps lower your LTCG tax in two ways:

The 3-year lock-in allows your investments to compound tax-free for a longer period. The longer you stay invested, the higher your gains and the lower your effective tax rate.

Gains from ELSS are taxed at a lower 10% rate compared to the 30% tax rate applicable on other equity funds. So for every Rs 1 lakh gain from ELSS, you save Rs 20,000 in taxes compared to a regular equity fund.

How are LTCG and ELSS funds dependent? 

Aspect LTCG ELSS funds
Tax implications Taxable at 10% on gains exceeding Rs. 1 lakh Tax deduction of up to Rs. 1.5 lakh under Section 80C
Holding period More than one year Three years lock-in period
Investment horizon Long-term focus Long-term focus
Capital appreciation Realised gains subject to taxation Potential for capital appreciation
Diversification Can be part of a diversified portfolio Invests primarily in equities

 

To wrap up

Investors must understand the relationship between LTCG and ELSS funds to determine their tax liabilities and make informed investment decisions. Remember to consult with an experienced financial advisor and conduct thorough research before making investment decisions to ensure that ELSS funds align with your financial objectives. 

Consider using an ELSS calculator to make your investment journey even more seamless. Start investing in ELSS funds today to take advantage of tax breaks and potentially higher returns.