(Also read: 10 income tax changes announced in Budget 2018)
From April 1, a new long-term capital gains tax will be imposed on equity mutual funds, including ELSS funds, according to Budget 2018 proposals. Also, dividend from equity mutual funds (including ELSS) would be taxed. For income tax purposes, a mutual fund scheme that invests 65 per cent or more of its portfolio in equities or equity-related instruments is considered an equity fund.
Here are five things to know on the new tax regime on ELSS funds:
1) The 10 per cent long-term capital gains tax on redemption of equity mutual fund units, including ELSS funds, will come into effect from April 1, 2018. So, if you sell before on or before March 31, 2018, there will be no long-term capital gains tax. Long-term capital gains mean gain or profit arising from selling of stock or redemption of equity mutual funds held for more than one year.
2) Long-term capital gains exceeding Rs 1 lakh arising from redemption of mutual fund units or equities on or after April 1, 2018 will be taxed at 10 per cent (plus cess). This includes long-term capital gains earned from your equity or mutual fund investments put together in a financial year. Suppose you earn Rs. 1.5 lakh in combined long-term capital gains from stocks or mutual fund investments in a financial year. The taxable long-term capital gains will be Rs 50,000 (Rs. 1.5 lakh - Rs. 1 lakh) and tax liability will be Rs. 5,000 (10 per cent of Rs. 50,000).
3) However, for the benefit of taxpayers, the gains from equity mutual funds (including ELSS) till January 31, 2018 will be grandfathered. This means only long-term gains made after January 31, 2018 will be taxed.
4) In the Union Budget, Finance Minister Arun Jaitley also proposed to impose a tax of 10 per cent on dividend distributed by equity mutual funds, including ELSS funds. While the long-term capital gains tax on equity mutual funds are meant for investors whose cumulative capital gains are in excess of Rs 1 lakh, the dividend distribution tax will be borne by all investors who have opted for dividend option of equity-oriented mutual funds.
5) Financial planners say that investors should not stop investing in ELSS funds because of imposition of the new tax. ELSS funds have the potential to generate higher returns over the long term, they say, as compared to other tax-saving investments.