Equity Linked Saving Scheme - Mutual Fund

Equity Linked Saving Scheme - Mutual Fund (ELSS) is a financial instrument provided by Mutual Fund companies which invest in equity and equity related products whose returns based on performance of equity market (in simple terms stock market). ELSS is suitable for investors having a high risk profile as returns in ELSS fluctuate depending upon the equity market and there are no fixed returns as other products like Fixed Deposit(FD), PPF account etc. ELSS has locking period of 3 years. Investor can not exist from these funds before 3 years.

Customer can buy ELSS mutual fund through agent or online (if they have demat account and trading account). Mutual fund company declares NAV (Net Asset Value) for each fund on daily working days to stock exchanges. Net Asset Value is the market value of the assets of the scheme minus its liabilities (which includes salary expense, operation and other expenses) of the mutual fund scheme. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. NAV will vary based on performance of their portfolio (purchased by fund managers). Mutual fund companies has their Fund Managers who has knowledge of equity and other products; they have very good analysis & research tools. Investors can find NAV for various funds on AMFI site, select category as ELSS.
Based on NAV, customer will get number of units (for ex. if customer wants to invest 10000/- in X ELSS scheme and NAV for that fund is 10.34/- then customer will get 10000/10.34 = 967.118 units of that fund).

There are three kind of investment options for mutual fund as below:
Growth option: In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the NAV of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss.
Dividend option: In this option the fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors.
Dividend reinvestment option: If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 10000 units of a fund and the fund declares dividend @ 1.5 per unit, the total dividend of 15000 (10000*1.5) will be reinvested on behalf of the investor as a fresh purchase. The investor can claim deductions to the tune of dividend received which is Rs 15000 in this case.

Period: There are 3 years of locking period for ELSS mutual fund, before 3 years investor can not sell their units. After that tenure its upto customer / investor.

Return Rate: ELSS returns depends on performance of the fund which is purely based on equity market. There are so many mutual fund companies in India so investor can study / view the past performance of these companies and based on that they can invest, but again past performance will not guaranty in future. Nobody can predict, sometimes it gives very good returns sometimes it gives negative / average return.

Safety: ELSS mutual funds invest in equity market, so again it is not safe as per equity market guidelines. Its not insured by any government body or some organization. 

Liquidity: Money invested in ELSS is liquidated easily by filling the redemption form and submit it to agent / mutual fund office. If investor bought it online then they can redeem it only, it takes few seconds and clicks. Investor will get money directly in their account / cheque from mutual fund company.

Tax exemption: Money invested in ELSS is exempted from Income Tax under Income Tax Act Section 80C up to 1 Lac. Individual can take this tax exemption for only one year in which money invested not for all 3 years.  In case of Dividend reinvestment option investor can take benefit in consecutive years if any dividend reinvested automatically.

Tax on Return (Dividend / Long term Capital Gain): Dividend or long term capital gain earned by ELSS units is taxfree. Dividend

On AMFI site, Investor can find list of mutual fund companies which are operated in India: Registered Mutual Fund Companies in India

Below are few funds:
SBI Tax Advantage Fund - Series I 
SBI Tax Advantage Fund - Series II 
SBI Magnum Taxgain Scheme 1993 
Principal Tax Saver / Savings Fund
Reliance Tax Saver (ELSS) Fund
Reliance Equity Linked Saving Fund Series 1 
HDFC Tax Saver 
Birla Sun Life Tax Relief 96 
Birla Sun Life Tax Plan 
Kotak Tax Saver 
UTI Equity Tax Savings Plan 
IDFC Tax Advantage (ELSS) Fund 
Sundaram Tax Saver 
L&T Tax Advantage Fund 
L&T Tax Saver Fund 
Canara Robeco Equity Tax Saver 
ICICI Prudential Tax Plan
BOI AXA Tax Advantage Fund 
Baroda Pioneer ELSS 96 
TATA Tax Saving Fund 
Franklin India Taxshield  

Investor can find the performance of ELSS by various mutual fund companies on financial portals / sites as below:
ELSS on Moneycontrol 
ELSS on Economic Times  
ELSS on Rediff Money
 

Capital Gain

What is Capital Gain?

Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains” in current assessment year. 
The definition of Capital Asset and Transfer are important and explained below.

Capital Asset:

Capital Assets are the properties of any kind (except below) held by a person whether or not connected with his / her business or profession.

• Stock-in-trade, consumable stores or raw-material held for business or profession.
• Items for personal effects like furniture, motor vehicles etc. (Jewellery [ including gold, silver, stone], Archaeological Collections, Drawings, Paintings, Sculptures or any work of art are Capital Assets.)
• Agriculture Land in India - it should not be situated in area within the jurisdiction of municipality, notified area committee, town area committee , cantonment board which has a population of not less than 10,000.
• Few bonds issued by Government of India (6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government, Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt).

Capital Assets are classified under two categories (Short Term & Long Term) depends upon the length for which the capital asset was held before the transfer.

Short Term Capital Asset: Capital Assets held for 36 months or less than are treated as Short Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Short Term Capital Assets if held for twelve months or less.

Long Term Capital Asset: Capital Assets held for more than 36 months are treated as Long Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Long Term Capital Assets if held for more than twelve months.

Transfer:

The word transfer defined as below under Income Tax act section 24(7):

• Sale of asset.
• Exchange of asset.
• Relinquishment of capital asset (surrender of asset).
• Extinguishment of any right on asset.
• Compulsory acquisition of capital asset under any law.

Note: Capital asset given as a gift or transferred through will not considered as transfer.

Types of Capital Gain:

Capital Gains are classified based on type of Capital Assets. Its important to under its classification to calculate the Capital Gain Tax. There are two types of Capital Gains:

Short Term Capital Gain:

Transfer of a Short Term Capital Asset gives rise to Short Term Capital Gains (STCG). Its calculated as below:

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54B, 54D, 54G).

Long Term Capital Gain:

Transfer of a Long Term Capital Asset gives rise to Long Term Capital Gains (LTCG). Its calculated as below:

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54, 54B, 54D, 54EC, 54ED, 54F & 54G).

Where, 
Indexed Cost of Acquisition = Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition)

Indexed Cost of  Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement)

CII - Cost Inflation Index.

Full Value of Consideration:

Full value of consideration includes the whole or complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. 
The following points are important to note in relation to full value of consideration:

• The consideration may be in cash or kind.
• The consideration received in kind is valued at its fair market value.
• It may be received or receivable.
• The consideration must be actual irrespective of its adequacy.

Cost of Acquisition:

It includes any expense at the time of acquiring capital asset under transfer, i.e., the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. It also includes expenses incurred on completing transfer.

Cost of Improvement:

It includes the capital expenditure incurred by assesse for making any addition / improvement (Protecting or Curing the title) in the Capital Asset. In other words all expenditure which are incurred to increase the value of Capital Asset.

Cost of Transfer / Expenditure on Transfer:

It includes the expenditure incurred wholly and exclusively for transfer of capital asset. Examples of expenditure on transfer are the commission or brokerage paid by seller, any fees like registration fees, cost of stamp papers, travelling expenses and litigation expenses etc. 

CII - Cost Inflation Index:

Its used while calculating Indexed Cost of Acquisition and Indexed Cost of Improvement. CII value for each financial year defined as below:

Financial Year	Cost Inflation Index
1981-82	100
1982-83	109
1983-84	116
1984-85	125
1985-86	133
1986-87	140
1987-88	150
1988-89	161
1989-90	172
1990-91	182
1991-92	199
1992-93	223
1993-94	244
1994-95	259
1995-96	281
1996-97	305
1997-98	331
1998-99	351
1999-2000	389
2000-01	406
2001-02	426
2002-03	447
2003-04	463
2004-05	480
2005-06	497
2006-07	519
2007-08	551
2008-09	582
2009-10	632
2010-11	711
2011-12	785

Capital Gain Tax:

Capital Gain Tax calculated on Capital Gain. There are two type of Capital Gain Tax:

Long Term Capital Gain Tax:

Long Term Capital Gain Tax will be calculated as 20% of Long Term Capital Gain.

Short Term Capital Gain Tax:

There will be no separate formula for calculating Short Term Capital Gain Tax. Short Term Capital Gain (STGC) will be included in Total Income and will be taxed as per Income Tax Slab / Rate of individual for assessment year.

Examples of calculating Capital Gain & Capital Gain Tax:

Example 1:
Person X purchased a house property for Rs. 1, 00,000 on 31st July 2000. Constructed the first floor in March 2003 for 1, 10,000. The house property was sold for Rs. 5, 00,000 on 1st April 2005. The expenses incurred on transfer of asset were Rs. 10,000.

In this case property possessed by person more than 36 months, Long Term Capital Gain (LTCG) will be applied.

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Full Value Consideration = 5,00,000/-
Indexed Cost of Acquisition =  Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition) = 1,00,000 X (497/406) = 1,22,414/-
Indexed Cost of Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement) = 1,10,000 X (497/447) = 1,22,304/-.
Cost of Transfer = 10,000/-

LTCG = 5,00,000 - (1,22,414 + 1,22,304 + 10,000) 
        = 2,45,282/-

Long Term Capital Gain Tax = 20 % LTCG = 49,056/-.

Example 2:
In above example consider, Person X purchased property on 31 January 2003.

In this case property held by person less than 36 months, so Short Term Capital Gain (STCG) will be calculated.

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

STCG = 5,00,000 - (1,00,000 + 1,10,000 + 10,000)
        = 2,80,000/-.

This LTCG included in Total Income of person and Income Tax will be calculated based on Income Tax Slab / Rate for individual for particular assessment year.