I have invested in equity mutual funds. I wish to know my tax implications if (a) I redeem my units in less than one year, or (b) I redeem my units after one year of purchase, (c) If I have an SIP that lasts for three years and I redeem my units at the end of three years. Also, what are the tax implications/benefits in the case of an ELSS.
Equity-linked funds are exempt from long-term capital gains tax, i.e., if you redeem your units after one year of purchase, then any gains you make upon such sale will be totally exempt from tax. However, if you redeem your units within one year from the date of allotment, then the profits that you book will be subject to a short-term capital gains tax of 10 per cent.
The same rules apply in case of investments through the SIP route. However, it is a little tricky here. Please note that in case of SIP the period of holding will be calculated individually for each installment. Suppose you start a monthly SIP from January 1, 2005, with each installment falling due on the first of every month. Now, your first installment will complete one year on December 31, 2005, after which any gains made upon the sale of these units will be exempt from tax. Likewise, in each successive month after December 31, 2005, your subsequent installments will complete one year one by one.
Therefore, if you run an SIP for three years, and sell all the units immediately after that, then only the investments made in the first two years will be exempt from tax, while the installments made in the last year will be subject to a short-term capital gains tax of 10 per cent.
For the purpose of taxation, units will be deemed to be sold on a First-In-First-Out (FIFO) basis, i.e., the units acquired earlier will be treated as sold first.
Regarding the tax benefits from ELSS, prior to this Budget, investments in ELSS up to a maximum of Rs 10,000 qualified for a rebate under section 88. However, according to this year's Budget, investments made in ELSS in the current financial year will be exempt from tax under section 80C, subject to an overall investment limit of Rs 1 lakh under this section.