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Claim tax benefits without actually making any investments
March, 26th 2015

As the year end is approaching, investments to be made and advance tax liability must have upset your cash flow adversely. Is there any solution to this situation where you can take the benefit of tax without actually having to use any fund? Yes if you have an existing investment in ELSS (Equity Linked Saving Scheme) which has completed three years. Current tax laws allow a deduction up to Rs.1.5 Lacs for investments made in certain equity oriented schemes popularly known as ELSS (Equity Linked Savings Scheme) under Section 80C. Of late the ELSS has become quite popular among tax payers due to the twin benefits of tax deduction and higher returns generated by these scheme due to ongoing bull run in equities.

Redemption and purchase of the units of the same scheme of ELSS

As the stock indices are trading near the record highs, the tax payers are apprehensive about investing in the ELSS at these levels in one go. The tax laws require you to hold the ELSS investment for three years. However in case you sell these after three year, the proceeds of redemption of ELSS units are fully exempt from Income Tax.

In case your existing investment in ELSS has completed the period of three years you have a good opportunity to avail the tax benefits without actually putting any extra money from your pocket. You can just recycle you old ELSS units without having to spare any extra funds.

There are two modes through which the tax payers invest in mutual funds including in ELSS. Either the investment is made in lump sum or the same has been made periodically either randomly or 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 your existing ELSS units which have already completed three years and simultaneously buying fresh units of the same scheme at the same NAV (Net Asset Value). Though the stock indices are trading at the peak, you are not taking any additional risk on the value at which you redeem or you invest, thus ensuring continuation of the investment at the same cost with added benefit of tax savings.

In case your investments in ELSS were made through SIP, you can only sell those units that have completed 36 months. If some units are still in lock in, you may choose to keep selling each month, and keep investing on the same day of redemption. In case you had made lump sum investments which have completed 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 0.001% of the redemption value. However the reinvestment of the same amount will entitle you to income tax benefits 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 capital gains on equity shares in a listed Company and on units in equity oriented schemes are exempt from tax provided two conditions are fulfilled. 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 sale/redemption. The second condition to be satisfied is securities transaction tax (STT) must have been paid on the sale or redemption transaction. Both the conditions need to be satisfied cumulatively. Since mutual fund will charge you STT 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 for capital gains taxation.

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 equity indices are trading at peak.

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