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Ramalingam Kalirajan |8534 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on May 15, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by BHARAT on Mar 24, 2025

If one invests in ELSS, is Section 80c deduction available against the SHORT TERM CAPITAL GAINS FROM DEBT MUTUAL FUNDS which is taxed at SLAB RATES and is NOT COVERED UNDER SECTION 111(A) Also, is Rebate under section 87a available in OLD TAX REGIME for incomes from LTCG FROM DEBT MUTUAL FUNDS and STCG from Equity and Debt MUTUAL FUNDS

Ans: Many investors miss the fine details around taxation of mutual fund gains and how tax benefits such as Section 80C deductions and Section 87A rebate apply, especially under the old tax regime.

Let’s explore the answer from a 360-degree personal finance perspective, and break down the two main parts of your query with clarity and structure.

Section 80C and Its Relationship with Mutual Fund Gains
Section 80C allows deduction up to Rs. 1.5 lakh from your gross total income.

ELSS (Equity Linked Saving Scheme) qualifies under this section.

This deduction reduces your taxable income, not the tax on capital gains.

ELSS investment will not offset or reduce capital gains tax directly.

It reduces overall gross income, subject to Section 80C cap.

Short Term Capital Gains (STCG) from debt mutual funds are taxed at slab rates.

This tax applies after your income is reduced by Section 80C deductions.

So yes, investing in ELSS does help lower overall income, not specific STCG tax.

You may get lower slab if ELSS brings your income into next slab bracket.

But it will not specifically reduce only the STCG tax portion.

STCG from Debt Mutual Funds and Section 80C Interaction
STCG on debt funds is now taxed at your income tax slab rate.

There is no benefit under Section 111A for debt mutual fund STCG.

Section 111A only covers STCG on equity mutual funds, taxed at 20%.

Section 80C deduction is applied to total income, not specific gain types.

So, if your gross income is Rs. 8 lakh, and Rs. 1.5 lakh goes into ELSS,

Taxable income becomes Rs. 6.5 lakh. STCG from debt is added here.

So ELSS reduces the tax base, not tax on specific STCG directly.

Section 87A Rebate in Old Tax Regime: Detailed Understanding
Section 87A gives rebate up to Rs. 12,500.

Available when total taxable income is up to Rs. 5 lakh.

This benefit exists even under the old tax regime.

So, if after deductions your taxable income is under Rs. 5 lakh,

Then no tax is payable even if you have capital gains.

But this rebate applies to total tax liability, not just salary.

If you have LTCG or STCG, it counts as income.

And if after adding capital gains your income crosses Rs. 5 lakh,

Then you lose the Section 87A rebate.

So plan smartly to keep income within that slab, if possible.

LTCG from Debt Mutual Funds: Interaction with Section 87A
From April 2023, LTCG and STCG in debt mutual funds are treated equally.

Both are taxed as per slab rate, no indexation benefit is allowed.

So even LTCG from debt funds adds to total income.

Rebate under Section 87A can still apply if net income is under Rs. 5 lakh.

But if income becomes Rs. 5.01 lakh, rebate is fully lost.

There is no partial rebate if you cross Rs. 5 lakh limit.

Plan ELSS, deductions, HRA, and 80D well to stay under Rs. 5 lakh if possible.

STCG from Equity Mutual Funds: Special Rule
STCG from equity mutual funds is taxed under Section 111A.

Flat 20% tax is applicable.

Section 87A does not cover tax under Section 111A.

Even if income is below Rs. 5 lakh, tax on equity STCG is payable.

So, you may end up paying tax on STCG despite low income.

Plan to time redemptions and match losses if possible.

Final Insights
ELSS under Section 80C helps reduce total income, not just gains tax.

Tax from STCG debt funds is applied after deductions, at slab rate.

Rebate under Section 87A in old regime is available up to Rs. 5 lakh income.

But it doesn’t cancel out STCG from equity funds taxed under Section 111A.

LTCG from debt funds is now fully taxable at slab rate, just like STCG.

You should always aim to optimise your deductions to bring income down.

Use ELSS, 80D, and other deductions to minimise tax in old regime.

Always time your redemptions of mutual funds across financial years.

Plan gains to fall in different tax years to use 87A effectively.

Rebalance gains and losses. This helps manage tax and maintain allocation.

Avoid investing in index funds. They do not beat market returns.

Actively managed funds offer alpha, better opportunity, and sector shifting.

Direct mutual funds may save commissions, but lack expert advice.

A Certified Financial Planner through a Mutual Fund Distributor gives you full support.

Helps in fund selection, review, tax efficiency, and portfolio alignment.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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