Your Queries – Mutual Funds: You can withdraw money from ELSS after lock-in period and reinvest it

Fund houses don’t deduct any taxes on capital gains except for investments made by NRIs where TDS is applicable.

I have been investing in ELSS for the past five years. As the lock-in is for three years, can I withdraw my first year’s investment and reinvest the amount?
—K S Singh
Yes, since the ELSS investment has completed five years, you can withdraw the first year’s investment and re-invest it. Long term capital gains tax would be applicable for capital gains of more than Rs 1 lakh in a financial year. If the re-investment is in an ELSS fund, a fresh three-year lock-in would be applicable on it. If goal is to create long-term wealth with equity investments, it is better to make fresh investments into the portfolio instead of withdrawing and re-investing the same.

If I withdraw some money from my lump sum investments, do I have to calculate the capital gains and pay the amount or will the fund house deduct the capital gains amount?
—Ramesh Anand
Yes, capital gains tax computation and payment (if applicable) on withdrawals of mutual fund investment have to be carried out by the investor. Fund houses don’t deduct any taxes on capital gains except for investments made by NRIs where TDS is applicable.

If I withdraw more than Rs 1 lakh from my mutual fund units, do I have to pay capital gains tax?
—C R Ranjan
For equity, capital gains tax has to be paid on capital gains exceeding Rs 1 lakh and not on withdrawn amount. For debt, capital gains tax is applicable if the investment has been held more than three years, and is taxed at 20% post indexation of costs or at 10% without indexation. If held for less than three years, the gains are added to income and taxed at marginal tax rate as applicable.

How can I save on expense ratio by investing in a direct plan?
—Aditya Kapoor
A direct plan is the one that an investor buys directly from the mutual fund. Since there is no intermediary involved in this transaction, the AMC does not have to pay any commission or trailing fees. If you are investing through a bank that is registered as a distributor you are investing in a regular plan (with higher expense ratio) and not a direct plan (with lower expense ratio). On the other hand, if the bank is a Registered Investment Advisor the investment could be in the ‘direct’ plan.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]