ELSS : How To Plough Back 3 Years Of Investments Into Perpetual Tax Saving Investment

There is no denying in the fact that among all the options available under section 80C of Income Tax Act, 1961, Equity Linked Savings Scheme (ELSS), as we all know, is the one of the most popular investment avenues. You can claim up to Rs. 1.5 lakh as deduction when you make investment in ELSS. However, to avail this claim every year, you need to invest Rs. 1.5 lakh every year. We assume that that you are only going to invest in ELSS for tax saving purpose under Section 80C.

There are many scenarios under which we may fail to invest in ELSS and not get the tax deduction. One of the most prevalent being the lack of liquidity as you may require the money for certain other financial goals, or let’s say, there was some emergency for which you had spent the money. However, there is one way with which you don’t need to invest incremental Rs. 1.5 lakh every year to get the tax benefit. Rather you can achieve this by ploughing back your ELSS investment after 3 years of lock-in period and turn this into a permanent tax saving investment.

Let us take an example. Let’s say you have invested Rs. 1.5 lakh in ELSS in the financial year 2018-19, which would be available for withdrawal in the financial year 2021-22. Then, the investment in the financial year 2019-20 would be available for withdrawal in the financial year 2022-23 and investment in the financial year 2020-21 would be available for withdrawal in the financial year 2023-24. So, technically, in these three years, you are investing a total of Rs. 4.5 lakh in ELSS and get the deduction in those respective years. However, the investment made in 2018-19 would be withdrawn in the year 2021-22 and you again invest the same in ELSS. You do the same for investments done in 2019-20 and 2020-21, and so on. By doing this, you would be only investing Rs. 4.5 lakh, which you can just keep on recycling on maturity and avail the tax deduction. While doing so, the amount needs to be adjusted for LTCG (Long Term Capital Gain) tax of 10 per cent.

To understand it more deeply, let us take a live example. We have taken the NAV (Net Asset Value) of an ELSS from financial year 2012-13. Following is the tabular representation of the analysis.



If we look at the above table, you can get an idea about how you would be able to avail the tax deduction despite making no new investment from FY17. What you need to do is just re-invest the required amount from ELSS and avail the tax benefit. 1.5 lakh every year from FY14 to FY16 at the start of the financial year. After that you just need to redeem the Rs. You invest 1.5 lakh from the investment made three years ago and reinvest it again in ELSS. However, there Rs. required units amounting to 1.5 lakh due to decline in the market value Rs. may be some instances wherein you could fall short of claiming the deduction of of your investment. So, only at that point, you would need to invest to the extent of the amount falling short. You can see in the above table that you end up having an amount which is actually more than what you require for tax deduction.