ELSS Tips: Do not withdraw money just by looking at the lock-in period, you will get more benefits if you continue investing..
Equity Linked Saving Scheme (ELSS) is not only a better way to invest money in the stock market, but investing in it also provides income tax exemption. Being a tax-saving mutual fund scheme, a lock-in period is applicable on investments made in it. But its lock-in period of 3 years is the lowest compared to other tax saving schemes. This means that the money invested in ELSS to save tax can be withdrawn after 3 years.
However, it is not necessary to withdraw the money invested in the scheme after 3 years. If you want, you can continue your investment further and continue to take advantage of market-based returns. That is, after the lock-in period of 3 years is over, the investment made in this scheme can be continued like any open-ended equity scheme. We will investigate further whether you should do this or not.
Tax applicable on investment and returns in ELSS
Investment up to Rs 1.5 lakh in equity-linked saving schemes during a financial year is tax-exempt under section 80C. If you want, instead of depositing Rs 1.5 lakh in one go, you can also invest in monthly installments through a Systematic Investment Plan (SIP). This will also reduce the risk related to market timing. If you sell your investment after holding it for 3 years, then there will be no tax on long-term capital gain (LTCG) i.e. profit up to Rs 1 lakh during a financial year.
Even if there is a profit of more than Rs 1 lakh in a financial year, the taxpayer does not have to pay tax as per his slab rate but has to pay LTCG tax at the rate of just 10 percent. That is, ELSS can be considered a very good scheme in terms of tax saving. Another good thing is that the lock-in period of ELSS is the lowest as compared to tax saving schemes like bank FD and PPF.
How to withdraw money from ELSS?
After the 3-year lock-in period of ELSS is over, you can easily withdraw your money. For this, you will have to make a redemption request. This request can be given online or offline. But while doing this, you have to keep one thing in mind if you have invested in the scheme through SIP, then the lock-in period of each of your monthly installments will be different.
As the installment completes 3 years, it can be withdrawn. In such a situation, you can also use a Systematic Withdrawal Plan (SWP) to withdraw your money. By the way, you can also use SWP to withdraw the lump sum amount. This will not only give you regular income but due to averaging, the market risk associated with withdrawing money will also be reduced.
Should money be withdrawn after 3 years?
Now let's come to the question of whether you should withdraw your investment made in ELSS after 3 years just because the lock-in period is over. The wise decision would be that you do not decide to sell your ELSS units just because the lock-in period is over. If your scheme is giving good returns and you do not need money for any other reason, then you should consider maintaining investment in the scheme.
You should not decide when to exit the scheme based on the lock-in period, but keep in mind your financial needs and investment goals. This is because the full benefit of investing in mutual funds is available only when one stays in it for a long time. The full benefit of compounding is available only when the investment is maintained for a long period.
Risk is associated with equity investment
According to SEBI guidelines, it is necessary to invest at least 80 percent of the funds in any ELSS scheme in equity i.e. stock market. There is no limit on maximum investment in equity. That is, technically equity investment in ELSS can be up to 100 percent. This is the reason why while investing in it, one must also keep in mind the risks associated with investing in the stock market.
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