Can ELSS be a permanent tax saving instrument?

ELSS, as we know, is one of the most popular investment avenues when it comes to tax saving. You can claim up to Rs 1.5 lakhs as a deduction under section 80C of Income Tax Act, 1961. However, to avail this deduction every year, you need to invest Rs 1.5 lakhs every year. Here, let us assume Rs 1.5 lakhs, which you are going to invest in ELSS, is only for tax saving purposes.

There may be many scenarios, where you might think of avoiding investment in ELSS. May it be for the fact that post the lock-in period of 3 years, you would require the corpus for the fulfillment of certain financial goals or, let us say some emergency, for which you need to redeem those units from ELSS. Having said that, there is one way with which you might not need to invest Rs 1.5 lakhs every year to get the tax benefit. Rather you can achieve this by plowing your ELSS investment after 3 years of lock-in period and turn this into a permanent tax-saving investment.

Let us take an example to answer this. Say, you have invested Rs 1.5 lakhs in ELSS in the Financial Year (FY) 2019-20, which would be available for withdrawal in FY 2022-23. Then investment in FY 2020-21 would be available for withdrawal in FY 2023-24 and investment in FY 2021-22 would be available for withdrawal in FY 2024-25. So, technically in these 3 years, you are investing a total of Rs 4.5 Lakhs in ELSS and get the deduction in those respective years, that is, in FY 2019-20, 2020-21, and 2021-22. However, the investment made in FY 2019-20 would be withdrawn in the year 2022-23 and again to be invested in ELSS. Further, you can repeat the same for FY 2020-21 and 2021-22 investments and continue doing so. This would be helpful, as you only need to invest Rs 4.5 Lakhs and just keep on recycling it, as it gets matured and avails the tax deduction. However, while doing so, you need to adjust it for Long Term Capital Gains Tax (LTCG) of 10 per cent with Rs 1 Lakh exemption.

To understand it clearly, let us take a live example. We have taken the Net Asset Value (NAV) of an ELSS from FY 2014-15. Here, we have also considered that you would be investing in a fund that was a top performer in the previous financial year. Following is the tabular representation of the analysis.

If we look at the above table then you can understand how you would be able to avail the tax deduction without any fresh investment. You would be left with a surplus instead, which can be invested to use for some other financial goals. The only thing you need to do is to re-invest the amount available in ELSS post the 3-year lock-in period. This way, you can avail tax benefits. However, there may be some instances, wherein, you would fall short to claim the deduction of Rs 1.5 Lakhs due to downfall in the market or the like. Hence, only at that point, you would need to invest in the shortfall amount. However, this can to some extent be avoided by simply re-investing the surplus in ELSS itself.

Our illustration would only be valid if your 100 per cent (Rs 1.5 Lakhs) investment is in ELSS. Also, it is to be noted that all the funds mentioned in this article are in no means any recommendations. These funds are taken just for illustration purposes. Hence, investors should either do their research or consult their financial advisors before investing.