When it comes to investing in ELSS funds, there are certain dos and don’ts involved. This also includes the taxation laws on switching from one ELSS fund to another. Investors also usually doubt the tax implications on their ELSS investments. This article aims to answer all these questions and help you understand the taxation related to ELSS investments. But before we jump into that, let’s quickly recall what ELSS investments are.


What are ELSS funds?

Equity-Linked Savings Scheme, popularly known as ELSS funds, are equity-oriented mutual fund schemes that allocate most of their assets, at least 80% of their portfolio, towards equity and equity-related securities. ELSS mutual funds are open-ended funds that primarily invest in shares of domestic companies. These mutual funds aim to generate wealth and have historically offered investors double-digit returns over time. ELSS funds have a lock-in duration of three years. This is one of the lowest lock-in durations compared to other Section 80C investments. Public Provident Fund (PPF), Bank Fixed Deposit (FD), and Unit-Linked Insurance Plan (ULIP) have a lock-in period of 15 years, five years, and five years, respectively.

ELSS funds are eligible for tax deduction under Section 80C. An investor can receive tax benefits for investments up to Rs 1.5 lac annually by investing in tax-saving assets. As an investor, you can save up to Rs 46,800 by investing in Section 80C investments. Thus, these tax-saver mutual funds offer investors tax-saving and wealth-creation opportunities.

Like any other type of equity fund, ELSS funds offer investors growth options and dividend options. Under the growth option, the returns earned on ELSS funds are further invested for higher wealth creation opportunities. The investor receives the entire lump sum amount on redemption in growth schemes. Conversely, the investor receives regular interest payments from their ELSS investments in the dividend option.

Though ELSS mutual funds offer the flexibility to investors to switch between the growth and dividend options among the same tax-saving scheme, one can only do it after the ELSS investment has completed its lock-in tenure. It is treated as a new investment for tax purposes when you switch from one ELSS plan to another. Hence, an investor would still be eligible for tax deduction under Section 80C.

However, switching from one fund to another is treated like a redemption case, meaning the returns would attract certain tax implications. ELSS funds have to be invested for a minimum duration of three years, and they do not attract any short-term capital gains (STCG), just long-term capital gains (LTCG). LTCG up to Rs 1 lac is exempt from tax. LTCG exceeding Rs 1 lac attracts an interest rate of 10% p.a. without any indexation benefit.

Happy investing! ELSS funds are a great option for investors who wish to fulfill their long-term investment goals. Though these funds have a lock-in period of just three years, experts recommend staying invested for a longer duration, say ten years or more, to fully benefit from equity investments.

Aly Jones
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