Investing in ELSS to save taxes? You have to pay more now to get full tax benefit

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Updated: Jul 02, 2020 6:58 PM

With the implementation of the Stamp Duty on financial securities transactions at the national level, 0.005 per cent Duty will be charged on amounts invested in MFs.

Stamp Duty, financial securities transactions, Stamp Duty at national level, Equity Linked Savings Scheme, ELSS, tax-saving instrument, 80C benefits, mutual fund, MF, stamp duty on MF transactionsThe Stamp Duty will be levied on both lump sum investments as well as investments through SIP.

The Equity Linked Savings Scheme is one of the popular tax-saving instruments due to its capacity to generate higher return in the long term apart from providing tax benefits on the investment amount and lower tax on long-term capital gain (LTCG) on maturity.

A part of the equity-oriented mutual fund (MF) category, ELSS schemes have a lock-in period of 3 years.

The amount invested in ELSS is eligible for tax deduction up to Rs 1,50,000 in a financial year u/s 80C of the Income Tax Act.

The LTCG on withdrawal up to Rs 1 lakh in a financial year is tax free, while 10 per cent capital gain tax is levied on redemption amount exceeding Rs 1 lakh in a financial year.

With the implementation of Stamp Duty from July 1, 2020 on financial securities transactions at the national level, 0.005 per cent Duty will be charged on amounts invested in MFs, including the investments in ELSS.

The Stamp Duty will be levied on both lump sum investments as well as investments through the Systematic Investment Plan (SIP).

So, if you invest Rs 1,50,000 in ELSS to save tax, Rs 7.50 will be deducted from the amount invested and the net investment amount will be Rs 1,49,992.50.

As a result, to get tax benefits on the entire eligible amount of Rs 1.5 lakh, you need to pay Rs 1,50,007.50 (the 0.005 per cent tax on Rs 7.50 will be negligible).

Stamp Duty will be levied on both regular and direct schemes and will be applicable on purchase through stock exchanges and also on purchases from the Asset Management Companies (AMCs).

Although the quantum of Stamp Duty is negligible especially for long-term investors, it may pinch the investors who make frequent investments and redemptions in short-term funds like liquid funds or overnight funds.

The Stamp Duty is also applicable on switches from one fund to another.

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