Should you reinvest ELSS money every three years to claim tax breaks?
Some retail investors like to reinvest their money in Equity Linked Saving Schemes (ELSS) every three years to claim tax benefits under Section 80C.
“Once the lock-in of three years is over, investors are investing the same money again in fourth year to claim taxation benefit under Section 80C,” says Sridevi Ganesh, CFP, Chamomile Investment. Investments in ELSS qualify for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
These investors typically invest Rs 1.5 lakh every year only for three years. After that they use the same money to re-invest in ELSS to claim tax benefits under Section 80C.
Mutual fund advisors frown upon this practice as they believe it will hamper the investment plans of individuals. They add that the strategy might help to claim tax benefit every year, but it will hinder the growth of investment over a long period.
“Wealth creation is a function of how much is actually invested. If you are not growing your investments, you will not be able to create wealth which will hamper your long term goals,” says Saurabh Mittal, Founder Partner, Circle Wealth Advisors.
Tax-saving is a part of your overall financial planning and advisors ask you to link your goals to your ELSS investments. “When you follow this practise of recycling your ELSS investments, you are actually separating tax planning from your overall financial planning, which should not happen”, says Mittal. ELSS funds are positioned as multicap schemes except for that the former have a lock-in of three years. These are equity schemes and one should not invest in ELSS schemes to take out after lock-in ends.
According to mutual fund advisors, the re-introduction of LTCG tax on equity-oriented schemes also queers the pitch for investors. The finance minister has reintroduced LTCG tax of 10 per cent over Rs 1 lakh in a financial year on equity mutual funds. This means you will end up paying 10 per cent tax on your capital gains of over Rs 1 lakh when your redeem your investments every year. “The impact of LTCG tax on ELSS investments which completed their lock-in this year might not be huge due to gains protected upto January 31st. But, going forward, investors need to factor in the taxation impact as well if they follow this practise”, says Ganesh.
According to mutual fund advisors, recycling of investors should be an exception under certain circumstances. “If you fall short of fresh money to invest and claim tax benefits for that year, you may use the investments which have completed three years lock-in period,” says Mittal.
Also, pensioners who use ELSS only for tax saving purposes and do not attach any goals to it may plan their tax saving in this manner. “Reinvesting the money which has completed its three years lock-in may work for retirees who otherwise want to remain in debt and want to use ELSS for their tax savings needs only,” adds Ganesh.
The suitability of this strategy will be very specific to a few retired folks as retired people need not have same goals and same risk profiles. “A consultation with your investment advisor would bring more clarity and understanding,” says Ganesh.