Invest more than Rs 1.5 lakh in ELSS mutual fund to claim full benefit under section 80C: Experts

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If you are investing in an equity-linked savings scheme (ELSS) to claim the tax benefit under section 80C of the Income-tax Act, 1961, then do make sure that you have invested marginally more than the specified limit of Rs 1.5 lakh in a financial year. According to chartered accountants, this is necessary to claim the full tax-saving benefit of Rs 1.5 lakh, which is the maximum allowed under section 80C. However, in order to do this you may have to end up investing at least Rs 500 more than Rs 1.5 lakh i.e. Rs 1,50,500 in case of a lump sum investment. In case of SIPs, the amount may have to be more.

The reason: Effective from July 1, 2020, investments in equity mutual funds attract stamp duty at the rate of 0.005%. This stamp duty is levied on every purchase transaction done as a lump sum investment and via SIP/STPs. The levy of stamp duty reduces the net amount invested in the scheme.

Here is how it will reduce the total amount invested in a scheme. For instance, a monthly SIP of Rs 12,500 in a tax-saving ELSS will attract a stamp duty of Rs 0.625. Thus, minus the stamp duty, every month the amount invested in the ELSS mutual fund will be Rs 12,499.375. And the net investment amount during the financial year will be Rs 1,49,992.50 (Rs 12,499.375 X 12) – Rs 7.5 short of the Rs 1.5 lakh limit.

According to tax experts, there is no clarity on whether the amount deducted as stamp duty is allowed as deduction under section 80C. Here is what they had to say about the matter:

Rama Karmakar, Tax Partner – People Advisory Services, EY India says, “According to Section 80C of the Income Tax Act, 1961, an individual can claim a deduction of up to Rs 1.5 lakh on the amount paid towards the subscription of any units of mutual funds covered under ELSS. With effect from July 01, 2020, stamp duty is levied on the purchase of mutual funds/ ELSS at the rate of 0.005%. However, it is not clear whether the amount eligible for deduction under section 80C of the Act, is on gross basis or on the amount net of such stamp duty. As this issue is debatable, if the individual prefers to be conservative, he/ she may claim deduction on net investment basis, i.e., contribution amount less the stamp duty.

Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, “Section 80C allows deduction in respect of various investments such as a subscription to units of ELSS, ULIPs, etc. The Indian Stamp Act provides for the levy of stamp duty at the rate of 0.005% on purchase of units. If an investor is investing Rs 50,000 then stamp duty of Rs 2.5 shall be levied, and a balance amount of Rs 49,997.5 will be invested in the units. The provision is silent whether the amount of deduction under Section 80C shall be arrived at before excluding or after excluding the stamp duty. It is advisable to claim the deduction for the net amount, that is, after excluding the stamp duty.”

Abhishek Soni, CEO & founder, Tax2win.in, an ITR filing website says, “Under the Income-tax law, there is no clarity regarding the stamp duty deduction applicable on mutual fund investment, whether it is eligible for deduction under section 80C or not. So as per one view, the amount of stamp duty applicable on investments made in mutual funds is not eligible for deduction under section 80C. Although the quantum of stamp duty is not significant and is negligible, so as per the second view, it can be claimed as deduction under section 80C. In our view, to avoid unnecessary litigation, one can invest a little more to claim the entire deduction available in the law. For example, if you invest Rs 1,50,000 in mutual Funds to save tax, Rs 7.50 will be deducted from the amount invested and the net investment amount will be Rs 1,49,992.50. As a result, to get tax benefits on the entire eligible amount of Rs 1.5 lakh, you should invest Rs 1,50,010.”

Do keep in mind that usually, mutual fund houses allow additional investments only in multiples of Rs 500. Thus, if your monthly mutual fund SIP is of Rs 12,500, then to claim the full benefit of Rs 1.5 lakh, you will be investing Rs 13,000 per month. Similarly, in case of lump-sum investment in ELSS mutual fund, the investment amount should be Rs 150,500 to avail the full benefit.

For instance, as per Mirae Asset Mutual Fund’s website, the minimum investment amount in Mirae Asset Tax Saver Fund is Rs 500 and in multiples of Rs 500 thereafter. The minimum additional investment in the ELSS scheme also starts at Rs 500 and in multiples of Rs 500 thereafter.

Similarly, as per the Axis Mutual Fund website, the minimum investment amount in their ELSS scheme, Axis Long Term Equity Fund, starts at Rs 500, irrespective of whether it is a lump sum amount, additional investment or SIP.

On the other hand, as per the ICICI Prudential Mutual fund website, the minimum investment in their ELSS fund (ICICI Prudential Long Term Equity Fund) starts at Rs 500 (plus in multiples of Re 1).

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