If the proposal of LTCG tax of 10% on equity capital gains of more than Rs. 1 lakh made in the Budget 2018 goes through then even the equity linked saving schemes (ELSS) which until now fetched tax free returns will also be taxed for long term capital gains @ 10% on redemption. So with this, going forward the tax-free label for ELSS is set to change soon.
ELSS are tax-saving mutual funds which qualify for deduction under Section 80C of the Income tax act. An individual by investing in an ELSS scheme can claim a maximum deduction of upto Rs. 1.5 lakh in a financial year. Further, till now returns from such schemes were tax free in the hands of investors after a lock-in period of three years.
So what should investors be doing now?
Experts in the mutual fund industry are of the opinion that investors in ELSS should avoid any immediate panic though the reintroduction of LTCG tax on equity capital gains shall be a blow to them. Nonetheless, the grandfathering clause in respect of LTCG has come as a big saviour which exempts taxation of all gains before the cut off date of 31st January, 2018 for investors. So, existing investors in ELSS schemes need not to worry for now.
For others who were considering an investment in ELSS, you can still park your money in these tax-saving mutual funds as the LTCG clause will apply only to capital gains of over Rs. 1 lakh.
Another point that could be noted here is that of all the tax-saving instruments eligible for tax deduction u/s 80C, ELSS have the shortest lock-in period of three years.
So, for dual benefits of calculated risk-adjusted returns from equity schemes and tax-saving benefits, investors can remain invested in ELSS which given the current scenario has potential to provide double digit returns post LTCG tax @ 10%.