How to save tax: Is ELSS redemption required after lock-in period? No need to redeem ELSS
- There are many ways to save income tax.
- But of these, the Equity Linked Savings Scheme is a popular tool.
- This provides investors with the double benefit of tax deduction along with increasing their money.
- If need be, it can be met before the deadline.
There are many ways to save income tax. But of these, the Equity Linked Savings Scheme (ELSS) is a popular tool. This is because it gives investors a double benefit of tax deduction as well as increasing their money. The lock-in period of ELSS is three years, which means that purchased units can be sold only after 36 months of holding.
Investors who have completed a mandatory three-year lock-in period with tax-saving investments in mutual funds usually opt for redemption to get the principal and return. But if you want to make your investment grow, there are other options you can consider. Adil Shetty, CEO of Bankbazaar.com Tell us what are the options for such investors.
- What is the lock-in period in ELSS?
Let us understand the lock-in period in ELSS with an example. Suppose you have invested a lump sum in ELSS on January 1, 2018. So you can redeem all units purchased on or after January 2, 2021. However, if you have activated a Systematic Investment Plan (SIP) in a tax-saving mutual fund scheme for three years, you can repay all the accumulated units only after six years from the first month of your SIP. For example, if your first SIP date was January 1, 2018, then all the units you have accumulated by January 1, 2021 can only be sold on January 2, 2024. Yes, you can partially redeem units purchased after completing three years. This simply means that units purchased on 1 January 2018 can be redeemed on 2 January 2021. This is because a lock-in period of three years will apply for each SIP installment.
- What to do after the lock-in period ends?
You can keep your investment as it is, even after your lock-in period is over – meaning you don’t have to touch it. This means that you should not invest further or make up for it. By doing so, you will no longer receive the benefit of a tax deduction, but you will continue to receive market-linked appreciation for your accumulated assets. This means that even if you don’t put more money into your investment, if the stock market performs well, the value of the money already invested will continue to increase. And whenever you need money, you can partially withdraw money from your ELSS investment and leave the rest of the investment as it is. Accumulated units are yours and do not need to be redeemed within the lock-in period like many other financial instruments.
- Can I extend ELSS even after the original term expires?
ELSS with SIP mode can be extended even after the expiration of the original term. It is noteworthy that ELSS is a profitable option in terms of returns like other long-term equity mutual fund schemes. If you renew your investment, you will continue to receive eligible annual tax deductions each financial year and your goal of increasing the amount will continue to be achieved. Renewing your investment also strengthens your financial system.
- Can I redeem ELSS for reinvestment?
If the tax saving of the amount invested in ELSS is met, you can repay the entire amount for reinvestment according to your financial objectives. But before doing so, check the performance of the fund. For example, if you have made an investment in the form of an SIP, you will not receive tax benefits on the investment made in the first year of the next financial year. In other words, investments made in units accumulated in a financial year will only be eligible for tax deduction in that year. If tax saving is your only goal, you can partially redeem the units every three years. Then, reinvest the same amount as a new investment in the same tax-saving plan or in another tax-saving plan to reap the tax-deductible benefit on that new investment in the new financial year. Also, if you want to invest in a growth-oriented plan, you can fully invest the redeemed amount in equity schemes, shares or other asset classes, whichever is right for you. A similar reinvestment strategy can be adopted for your lump sum investment in ELSS.
- When to consider encashing ELSS?
You should consider redeeming or cashing out an ELSS investment only in the event of a financial emergency. But before you do that, you should explore all the other available options. If your need is less than the amount currently invested, you can repay the amount as needed instead of withdrawing the entire amount. However, it is important to note that the redemption amount of ELSS is taxable. If you withdraw a profit of more than Rs 1 lakh, long-term capital gains on equity above Rs 1 lakh will be taxed at 10%. If any dividend is received, it will be added to your income and then the prevailing tax rate will apply.
- What to do if premature release seems necessary?
Before redeeming, think about why you want to redeem. If you don’t need money, don’t redeem because it’s time to remove your unit. Be patient and take action only when you have a clear vision of your future investment strategy. It can be a good idea to review your tax-saving mutual funds and make decisions based on their performance. Also, keep in mind that investing in ELSS gives good returns only if you have invested for a long period of time i.e. for at least 5-7 years.
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