Is It Wise To Reinvest ELSS Money Every Three Years ?

By BankBazaar | August 31, 2018

Reinvesting your ELSS money to claim tax benefits seems like a sensible option. But is it really? Let’s find out.

Is It Wise To Reinvest ELSS Money Every Three Years ?

Equity Linked Savings Schemes (ELSS) are one of the most sought after investment options. They are a type of equity-diversified Mutual Funds that mainly invest in stocks across sectors. The number one reason for ELSS to be a popular choice among investors is the fact that it is a tax-saving investment option.

Therefore, given its dual feature of helping you double your wealth and saving taxes, most investors are likely to reinvest their money in ELSS every three years to claim tax benefits under Section 80C.

Don’t know what ELSS is? Read this article.

Mutual Fund experts say that despite the introduction of Long Term Capital Gains Tax (LTCGT) a lot of investors still prefer reinvesting their ELSS investments. So, how does this work, you ask?

ELSS has a lock-in period of 3 years and once the investment has completed its tenure, investors of ELSS are investing the same money in the fourth year instead of putting in fresh money. And this is mainly done to claim taxation benefit of up to Rs. 1.5 lakhs under Section 80C.

How this works is that the investor chooses to invest Rs. 1.5 lakhs every year for three years, and at the end of the three years he/she uses the same money to reinvest. However, most experts believe that by doing so an investor hampers their own investment plan. Although, this strategy may help the investor get tax benefits, in the long run it hinders the growth of that particular investment.

The popular belief among seasoned investors is that if you don’t grow your investment amount you cannot create wealth at the momentum you wish to. And this in turn will hamper your financial goals in the long term. When you reinvest your ELSS money you end up separating tax planning from your overall financial planning.

The introduction of LTCG tax on equity investment schemes isn’t doing any good for investors either. Currently the LTCG tax stands at 10% for gains of over Rs. 1 lakh in a financial year on equity Mutual Funds. What this means is that an investor will be paying 10% tax on all capital gains of Rs. 1 lakh when it’s time to redeem investments.

Additional Reading: Why The LTCG Tax Is No Big Deal

However, the concept of recycling the ELSS amount does hold well under a few other circumstances. Suppose you fall short of money to invest and want to claim a tax benefit, then it is wise to reinvest your money after the three year lock-in period.

This method can be used by pensioners too who do not have any goals attached to their investment apart from the tax savings benefit.

Ultimately, it boils down to each investor and their preference. As a risk averse investor one may feel the need to reinvest the earnings to get tax benefits. But, on the other hand, a retail investor will think differently and will not consider reinvesting as it may slow down his investment growth.

New to investing in Mutual Funds? Don’t get threatened by the risks they pose. Invest smartly in a Systematic Investment Plan (SIP) and see your money grow.

Additional Reading: 4 Reasons Why You Should Adopt The SIP Route When Investing

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Category: ELSS UCN

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