Save tax for lifetime with just three years of investment in ELSS

Yes! You read it right. Assuming 30 years of career you can save lot of tax with investment of ₹4.5 lacs in three years

And Remember! Amount saved is amount Earned!!

 Here is summary what you can save with ELSS -

Tax Bracket
Tax saving in one year
Tax saving in 30 years
5%
₹7500
₹2.25 lac
20%
₹30000
₹9 lac
30%
₹45000
₹13.5 lac

Please note that you are not losing this ₹4.5 lac. In fact this ₹4.5 lac could grow more than ₹1 Crore if you keep it invested. Thus you are saving ₹9 lac and gaining wealth more than ₹1 Cr. Does it sound interesting? Let me explain it to you.

My aim is to show how to save tax with just 3 years of investing in ELSS. Everybody knows compounding. The more you invest, more you create wealth. This article can derail you from your investing habit. Hence if you follow this methodology you must invest ₹1.5 lac which you would have invested in ELSS into higher return instruments like Mid cap & Small Cap funds. This is MUST. Other wise close this tab and forget about this article.

ELSS Lock-in:
ELSS mutual funds have 3 years of lock-in period. It means if you invest ₹1.5 lac under section 80C into ELSS fund today, you can redeem/withdraw it after completing 3 years. This is for lumpsum investment. For SIP investments, whichever installments have completed 3 years shall be redeemable. Because SIP is nothing but continuous flow of lumpsum investments.

The Hack:
Now here is a trick. After completing 3 years, you can withdraw all amount from particular scheme and invest the same in different or same scheme. Confused? Let's try with example.
  1. Suppose I am investing ₹1.5 lac on 5th April 2018 into an good ELSS fund A1. 
  2. In next year, I invest another ₹1.5 lac on 8th April 2019 in another ELSS fund B1. 
  3. Further on 3rd April 2020 I invest ₹1.5 lac in fund C1.
  4. On 5th April 2021 I can withdraw amount from my first investment from fund A1. After 3-4 days when amount gets credited in bank account and I receive statements from AMC, I can invest that same amount in another fund A2 or same fund A1. 
  5. Thus I have fulfilled my tax obligation to invest ₹1.5 lac or more in ELSS to take tax benefits for financial year 2021-22., but actually I haven't really invested fresh amount. I am reinvesting amount+returns from first years investment into forth year. 
  6. Similarly in fifth year I can invest amount withdrawn from B1 to B2. And we can follow same cycle throughout lifetime. Image below demonstrates the same fact about rotation of the investment

Points to Note:
  • This reinvesting methodology demotivates disciplined investing for tax saving. One should note investing is necessary to create wealth. If ₹4.5 lac can give you ₹1 Cr, ₹9 lac of investment can give you ₹2 Cr. 
  • Thus one should continue investing in small & mid cap funds or stocks and not deviate from investing habit. I am writing this post to show that it is not necessary to invest ₹1.5 lac in ELSS schemes every year. Instead one can invest same ₹1.5 lac in other category schemes which give higher returns. 
  • Average ELSS scheme returns are better than average of Large cap schemes. Thus only option is to go for small & mid cap mutual funds or stocks.

Please comment if you have suggestions or queries. 

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