How to calculate tax on ELSS or tax saving fund

Whether it is the additional 10% on a bottle of sauce or a buy-one-get-one offer on a pack of soap, getting something extra always feels great. ELSS or Equity-Linked Savings Scheme also offers an extra benefit. ELSS is a type of mutual fund that primarily invests in equity and equity-linked securities. It is suitable for capital appreciation over the long term, but the scheme can also be used to save tax under Section 80C of the Income Tax Act, 1961. However, in order to benefit from this additional advantage, you must first know how to calculate tax on ELSS so you can plan your taxes and investments properly.

Keep reading to find out more about tax savings through ELSS.

How much of your investment is tax-free in ELSS?

ELSS funds qualify for a tax deduction of up to Rs 1.5 lakh in a financial year under Section 80C. This means that only investments up to Rs 1.5 lakh can be used to claim a tax deduction when filing an Income Tax Return (ITR). For example, if you invest Rs 2 lakh in an ELSS fund in a financial year, you will be eligible for a tax deduction of only Rs 1.5 lakh. The remaining Rs 50,000 will be taxable as per your applicable tax slab.  

An important thing to remember is that ELSS is the only mutual fund scheme included in Section 80C investment options. However, you can combine multiple ELSS funds to claim the Rs 1.5 lakh deduction or invest in a single ELSS fund – it is entirely your choice. 

How do you calculate tax savings on ELSS?

You can use the following formula to calculate your tax savings from an ELSS fund:

Money saved in tax = P x T

Here,

P = Total yearly investment amount, subject to a maximum of Rs 1.5 lakh for all 80C investments

T = Applicable tax rate

For example, if you invest Rs 1.5 lakh per year in an ELSS fund of your choice, and you fall in the highest tax bracket of 30%, you will be able to save:

1,50,000 x 30/100 = Rs 45,000

With a 4% cess, the additional tax saving comes to Rs 1,800 (4% of 45,000)

So, the total tax savings = 45,000 + 1,800 = Rs 46,800

Your tax savings will depend on the income tax bracket and the rate applicable to you. For instance, if you fall under the 20% tax rate category, your tax savings will be reduced to Rs 31,200, assuming the same investment amount of Rs 1.5 lakh and a 4% cess as the example shown above.

Note: Remember to always consider the latest tax slabs for tax planning, as these may change with time.

Now that you know about tax savings on your ELSS investments, the next thing in line is the taxation of your returns from an ELSS fund.

Is ELSS tax-free on maturity?

ELSS is not entirely tax-free on maturity. However, you do get a partial tax exemption on gains up to Rs 1 lakh per year. To understand this, you must first understand some rules of mutual fund taxation. 

The returns from mutual funds are considered capital gains and are taxed as short- and long-term capital gains based on how long you stay invested in the fund. This is called the holding period. For equity funds, a holding period of a year or less is considered short-term, and a holding period of more than a year is considered long-term. Since ELSS funds have a lock-in period of three years, they only qualify for long-term capital gains tax (LTCG). Here’s how this is levied:

• Long-term gains of up to Rs 1 lakh per year earned fromELSS funds are exempt from tax.
• Any long-term gains over the Rs 1 lakh limit in a year are taxed at a flat 10% + cess and surcharge

Conclusion        

Understanding mutual fund taxation is essential to ensure that not only do you earn money through returns but also save money spent on tax. Now that you know how to calculate tax, you can use this information in tax planning and maximise your returns. 

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