As the financial year comes to a close on March 31, taxpayers are seeking tax-free financial instruments to claim deductions. Aside from term insurance, NSC, PPF, and NPS, retail investors can also consider ELSS mutual funds. ELSS funds have a three-year lock-in period and provide equity exposure along with tax benefits under section 80C of the Income Tax Act, allowing investors to claim an exemption of up to ₹1,50,000. With a total of 42 ELSS mutual funds and assets worth ₹2.04 lakh crore, this category has delivered impressive returns, with one-year returns at 37.83% and an annualised return of 19.50% over the past two years, according to MorningStar data as of Feb 22, 2024. Additionally, it’s recommended for investors with moderate to high-risk appetite as ELSS not only aids in tax saving but also facilitates wealth creation. If considering a switch to ELSS after redeeming current equity investments, it’s crucial to be aware of the key provisions.
Five key provisions to know
1 If you sell your equity investment prior to March 31, 2024 which you purchased less than a year ago, the capital gains will be taxed as per short term capital gains (STCG) tax.
2. If your current equity investments are more than one-year old and you redeem them before March 31 this year, the gains will be taxed as per the provisions of long-term capital gains (LTCG) tax i.e., at the rate of 10 per cent. If you want to claim indexation, the applicable tax rate will be 20 percent.
3. The LTCG is applicable only when the gains from investment in equity in one financial year amount to more than ₹one lakh.
4. If you want to avail tax deduction for the current fiscal, you must invest in one of the ELSS schemes before March 31, 2024.
5. If you invested in ELSS schemes more than three years ago, you can redeem them and re-invest the proceeds before the end of the financial year in order to claim tax benefits for the current financial year.