What should your ELSS investing plan look like?

What should your ELSS investing plan look like?

by 5paisa Research Team Last Updated: 2022-07-13T15:26:24+05:30 IST

What should your ELSS investing plan look like?

ELSS is one of the most efficient methods to invest in a tax-saving instrument to take advantage of Section 80C benefits. What if we told you that you just need to invest Rs 4.5 lakh in ELSS to reap lifetime benefits? Let us investigate.

Apart from Public Provident Fund (PPF), life insurance policies and other tax-saving investments, Equity Linked Savings Scheme (ELSS) is one of the most popular options for tax savings. Section 80C of the Income Tax Act of 1961 allows you a deduction of up to Rs 1.5 lakh.

To be eligible for this claim, you must deposit Rs 1.5 lakh each year. This Rs 1.5 lakh is based on the assumption that you will exclusively invest in ELSS to save taxes. There are several instances in which we may fail to invest in ELSS and hence miss out on the tax deduction. Then it's possible that after the three-year lock-in period, you needed that money for other financial goals, or that there was an emergency that compelled you to redeem ELSS units.

However, there is one technique that, if executed, would eliminate the requirement to invest Rs 1.5 lakh each year in order to receive the tax advantage. Rather after three years of lock-in, you may reinvest your ELSS investment and transform it into a permanent tax-saving investment.

Let us demonstrate it for you so you may better grasp it. Assume you invested Rs 1.5 lakh in ELSS in fiscal year 2021-22, which would be eligible for withdrawal in fiscal year 2024-25. Then, investments made in fiscal years 2022-23 would be eligible for withdrawal in fiscal years 2025-26, while investments made in fiscal years 2023-24 would be available for withdrawal in fiscal years 2027-28. 

As a result, in these three years, you are investing a total of Rs 4.5 lakh in ELSS and benefiting from the deduction. However, the investment made in 2021-22 would be redeemed in 2024-25 and the entire withdrawn amount would be reinvested in ELSS.

Repeat the same for 2022-23, 2023-24, and so on. By doing so, you would only be investing Rs 4.5 lakh to just keep recycling it when it becomes free of the lock-in term and qualify for the tax benefit. While doing so, it must be adjusted for LTCG (Long Term Capital Gains Tax) of 10% on gains above Rs 1 lakh.


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