Every year we have to look for tax saving investments, many times we leave it till it is too late and then invest in a hurry and in sub-optimal instruments.
Would you be interested to know about an excellent investment avenue in which you invest money to save tax only for three years and after that you will not required to save more money?
If yes, then read on.
The name of the instrument is ELSS (Equity Linked Saving Scheme). Investment in ELSS up to ₹1,50,000 is exempt from Income Tax under section 80C of Income Tax act.
If you invest in ELSS for 3 years, then after that you may not be required to make investments for Tax-Savings. Let us try to understand this by an example:
- Year 1,2 & 3 – Investments made in ELSS – ₹1,50,000 per year
- Year 4 – Investments made in year 1 are out of lock in period. Redeem them and invest again in ELSS.
- Year 5 – Investments made in year 2 are out of lock in period. Redeem them and invest again in ELSS.
- Year 6 – Investments made in year 3 are out of lock in period. Redeem them and invest again in ELSS.
- Repeat the process.
The capital gains in Equity Linked Mutual Funds are tax free if redeemed after 1 year and since ELSS have a lock-in of 3 years (lowest in all tax saving instruments under 80C) the profit from ELSS is tax free upon redemption.
The advantage of this strategy is that you need not look for fresh money each year for Investments under section 80C. Also, you will gain from long term investments in Equity market.
The gains from the ELSS funds in above option can be invested in other Equity Mutual Funds or may be invested again in ELSS to make full use of compounding in the investments.
Points to remember for tax saving:
- Since ELSS has lock-in of 3 years, if you do SIP in ELSS, each installment will be locked in for 3 years and you have to reinvest each installment accordingly.
- Since maximum tax saving limit under 80C is ₹1,50,000, you have to calculate the amount to invest in ELSS according to other 80C investments such as Employee Provident Fund.
- This strategy will work till ELSS is exempt under section 80C.
- Do not stop making fresh investments Year 4 on wards, select an appropriate mutual fund (other than ELSS) according to your goal and invest in the same.
Invest in ELSS funds on WealthTrust mutual fund app now.