Recycle ELSS For Better Returns!

“Presently Income Tax Act allows  a deduction for an amount equal to Rs.One lac  for investments made in equity oriented schemes popularly known as ELSS (Equity Linked Savings Scheme). This deduction is available to the investors  together with other items of expenses and investments. ELSS became quite popular with the investors owing to  the twin benefits of tax deduction and higher returns on the investments.

Since  stock indices have reached almost the record highs, the tax payers are apprehensive about investing  in the ELSS at these levels.  The Income Tax Act, requires you to hold the investments in ELSS for a minimum period of three years. In case you transfer these investments in ELSS before completion of three years, the income tax benefits enjoyed earlier on investments made in the said schemes  become income of the year in which you transfer these ELSS units. The proceeds of money received on redemption of ELSS units which have completed three years are completely  exempt  from any levy of Income Tax.
For the persons who have already completed the mandatory holding period of three years of their ELSS investments, this offers them a good opportunity to avail the tax benefits without actually putting any extra money out of their pockets.

In case your investments in the ELSS have already completed the lock-in period of three years, you can just recycle the earlier investment made in ELSS without incurring any additional costs on this account.

There are two modes through which the tax payers make their investments in the mutual funds including investments in ELSS. Either the investment is made in lump sum or the investments have been made periodically through Systematic Investment Plan popularly known as SIP. Since you are not willing to take any additional exposure in the equity market at these levels, you can redeem the units which have already completed the mandatory lock-in period of three years and purchase fresh units of the same scheme from the redemption proceeds at the same NAV (Net Asset Value). This way you are not taking  any risk on the value at which you redeem or you invest, thus ensuring continuation of the investment at the same cost.
In case your investments in ELSS were made through SIP and only a few installments have completed the mandatory period of three years, you can start another SIP so as to match redemption and purchase of the units which have already completed the period of 36 months. In case the investments were made at one go and have completed the holding period of three years, you need to do the redemption and purchase at one go to ensure the continuity of cost of investments.
You can recycle your ELSS in a very economical way and avail tax benefits.

The fund house charges a Security Transaction Tax on the amount of redemption at the rate of 0.25% of the redemption value. However the reinvestment of your proceeds of redemption will entitle you to income tax benefits and help you save in tax at the rate ranging from 10% to 30% depending on your tax bracket.

In addition to the cost incurred on account of Security Transaction Tax on redemption of your old units, this methodology  does not have any other tax implications.  Presently all the profits made on transfer of equity shares in a Company and units in equity oriented schemes  are exempt subject to fulfillment of some conditions. The first condition to be fulfilled is that these shares and units in equity-oriented units must have been held for a minimum period of one year or more on the date of transfer. The second condition to be satisfied is that the transaction of transfer should have suffered a levy of Security Transaction Tax. Both the conditions need to be satisfied cumulatively. Since mutual fund will charge you Security Transaction Tax on the redemption of your earlier units, and since you are planning to recycle the units of ELSS which have completed more than three years as against the requirement of one year, all your capital gains on redemption of earlier ELSS units will be exempt from tax. Let me point out to you that all the investments in ELSS are treated as investments in equity oriented units.

The Direct Tax Code proposes to withdraw the benefits of tax deduction in respect of savings in the form of investments in ELSS. The DTC proposes to make this benefits of savings available in respect of certain very long-term saving schemes like provident fund, approved gratuity fund, pension fund and superannuation fund which all are in the nature of retirement planning. This recycling will help you in preserving the funds which you may need for short-term or not very long-term like purchase of house.

From the above discussion, it becomes clear that you can recycle your existing  units of ELSS to take the income tax benefits without committing any further funds to the equity market when the Sensex is at a record high. This can be achieved by incurring  a very small cost in the form of Security Transaction Tax on the redemption value. This  methodology of recycling can also be very effectively used in the situations when you do not have funds available with you for making investments and you have accumulated units of ELSS purchased earlier which have completed the mandatory holding period.


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