Check out: Tax treatment of ELSS

Equity Linked Savings Schemes (ELSS) is a tax saving mutual fund that are open for investments during the year. There are different kinds of tax benefits that the investors can expect with the instrument and hence there is a need to take a careful look at how this entire thing is structured.

There has to be a look at the performance of the fund along with the other conditions while making a purchase decision and hence this will require some work. Here are the tax benefits that will come along with the fund.

Investment deduction

ELSS funds are one of the eligible options that qualify for a deduction under Section 80C of the Income Tax Act. This means that the investments made into the fund will qualify for a deduction from the taxable income of the individual. This is part of the overall limit of Rs 1 lakh that is available for individuals and they can make the full use of this limit in the instrument.
There is a 3 year lock in that is present on the ELSS funds so this will need to be considered at the time of making the investment. The investment will lead to a reduction of the taxable income by the amount of the investment and this constitutes the initial tax benefit.

Dividend

The ELSS is an equity oriented option as the entire portfolio of the fund is invested into equity shares. This is actually the only pure equity option that is present under Section 80C for the individual and hence when it comes to the issue of asset allocation this point needs to be considered.
In terms of the receipt of the earning on the fund the dividend that is actually received is tax free in the hands of the investor. There is also no dividend distribution tax that will be levied on the fund at the time of the payment of the dividend so this means of getting the earnings from the fund will be tax free without any indirect impact being present.

Capital gains

The other route in which the investor will actually gain from the investment is through capital gains on the amount invested. This happens when the investor get an appreciation in the value due to the rise in the Net Asset Value (NAV) of the fund. Since there is a three year lock in on the fund there cannot be a short term capital gains earned on the investments.
So the long term capital gains that is actually earned on the investment will be tax free in the  hands of the receiver as there is no tax that is levied on equity oriented funds that have been held for a period of more than one year. There will be a securities transaction tax that has to be paid at the time of the sale of the units but the fund will deduct this amount and give the remaining figure to the investor. On the other hand if there is a long term capital loss that is incurred then the individual will have to discard this from the tax calculation because the loss cannot be set off against any other income.

-Arnav Pandya

The author is a Financial Planner and can be reached at arnavpandya@hotmail.com