As we approach the end of another financial year, many of you would be trying to find an investment that qualifies for 80C tax benefit upto 1.5 Lakhs. You may not have used ELSS mutual funds though they are the ones having the shortest lock-in period, due to fear of investing in a risky equity product. The lock-in for ELSS mutual funds is 3 years.
ELSS mutual funds are risky, how to reduce the risk and get tax benefit?
It is true that ELSS mutual funds are invested 80% or more in equity and hence are highly risky. However there is a simple means to re-cycle your investments by redeeming after 3 years and re-investing the same. You may have heard advise that equity funds are for long term and not for only 3 years. If you redeem after 3 years, there is no guarantee of gain. While this advise is true, you can redeem and reinvest the same amount every third year, thereby continuing your investment for a longer period.
Illustration of ELSS mutual fund investment recycling
I have taken an example of investing in Axis Long term equity fund Direct Growth. The first investment is done on March 2013, the second investment on March 2014 and the third investment on March 2015. The investment is Rs. 1.5 L per year, totaling Rs. 4.5 L in invested amount. There after, the subsequent years, there is a redemption for Rs. 1.5 L, followed by an investment of identical amount. By doing this, you can get tax benefit of Rs. 1.5 L per year without making further investments after the initial 3 years. Below is a table which shows this:
In this example, as the NAV has been increasing every year, additional investment was not required. However, if there is a decrease in NAV after 3 years and the value of invested Rs. 1.5 L is less than the invested amount, you may need to invest additional amounts.
Can this still be used after the introduction of the new tax slabs?
The 80C tax benefit is not applicable in the new tax slabs which were introduced in Budget 2020. However you have the choice of staying with the old tax slab which has the 80C benefit for FY 20-21. As announced by The finance minister, the tax slabs in future will be simple and without tax breaks such as 80C. But for now, you have the choice. For how long this choice will be available needs to be watched in the future budgets.
Disclaimer: I make no claims of suitability of ELSS mutual funds to all investors. Please invest based on your risk profile after due analysis of all scheme related documents.