How should your ELSS investment strategy be?

When it comes to tax saving, Equity Linked Savings Scheme (ELSS) ranks one of the most popular investment avenues, apart from public provident fund (PPF), life insurance policy, etc. You can claim up to Rs 1.5 lakh as a deduction under section 80C of Income Tax Act, 1961. However, to claim this, you need to invest Rs 1.5 lakh per year. This amount is only for investing in ELSS for tax saving purposes.  

There are many scenarios, due to which, we may fail to invest in ELSS and not get the tax deduction. It can be due to the fact that post the lock-in period of 3 years, you may require that money for certain financial goals, or let’s say, some emergency may pop up for which, you redeem units from ELSS. 

However, there is one strategy, which if implemented, would not ask you to invest Rs 1.5 lakh every year for tax benefit. Rather, you can achieve this by ploughing your ELSS investment after 3 years of lock-in period and turn this into a permanent tax-saving investment.  

To understand this in a better way, let us illustrate it for you. Say, you have invested Rs 1.5 lakh in ELSS in the financial year 2019-20, which would be available for withdrawal in the financial year 2022-23. Then investment in the financial year 2020-21 would be available for withdrawal in the financial year 2023-24 and investment made in the financial year 2021-22 would be available for withdrawal in 2024-25. Hence, technically, in these 3 years, you are investing a total of Rs 4.5 lakh in ELSS and availing the deduction in those respective years. However, the investment made in 2019-20 would be withdrawn in the year 2022-23 and again, invest the whole withdrawn amount back in ELSS. Further, do the same for 2020-21, 2021-22, and so forth. By doing so, you would only be investing Rs 4.5 lakh to just keep on recycling it as it gets free from the lock-in period and avail the tax deduction. While doing so, it needs to be adjusted for long-term capital gains tax (LTCG) of 10 per cent on the gains above Rs 1 lakh. 

The math behind this 

Let’s understand the formula behind this, more deeply. For this, we have taken the net asset value (NAV) of an ELSS from the financial year 2012-13. Further, the best fund based on historical performance was selected for investment. Following is a tabular representation of the analysis. 

The table above clearly shows how you can avail of the tax deduction even without making any new investment. All you need to do is just invest the matured amount in ELSS and avail the tax benefit. However, there may be a few instances wherein, you might fall short to claim the deduction of Rs 1.5 lakh due to some downfall in the market or the like. Therefore, only at that point, you would need to invest in the shortfall amount. 

It is further evident from the table that you may end up having an amount that is actually more than what you require for a tax deduction, considering that the more conservative approach has been parked in the savings bank account. However, as mentioned earlier, you can invest the entire matured amount in the ELSS itself.