Mutual Funds Beginner

ELSS fund lock-in period

debt funds

The Equity-Linked Saving Scheme (ELSS) is a type of mutual fund. It is designed to offer tax benefits to investors under section 80C of the Indian Income Tax Act. Such funds help promote long-term investments while instilling discipline in investors. So what’s the catch? Some would say the lock-in period. But is it really?

What is the lock-in period in an ELSS fund?

The lock-in period for an ELSS fund is three years. Locking the investment up for this period is mandatory. So you cannot redeem or withdraw the money you invest for three years from the date of investment.

When you consider tax relief for investors under section 80C, this is one of the lowest lock-ins you’ll find. All other tax-saving instruments available have a much longer lock-in requirement. For instance, the lock-in for the National Savings Certificate (NSC) is 5 years, and Public Provident Fund (PPF) is 15 years.

Ways to invest and the lock-in period

Investors can opt for ELSS funds in one of two ways.

1. Lump sum

ELSS investors can make a one-time payment if they wish to. With a lump-sum investment, the three-year lock-in period starts from the day the mutual fund company receives the money. That is the day of the purchase.

2. SIP

Investors can also take the Systematic Investment Plan (SIP) route to invest in ELSS funds. With this option, the investor invests a smaller sum of money periodically for a fixed term. The investment can occur on a weekly, fortnightly, monthly, semi-annual, or annual basis. The investor gets to choose the periodicity.

However, in this case, the lock-in period will be calculated sequentially—so that’s three years from the date of each SIP installment. In other words, the redemption or withdrawal is staggered like the installments.

Let’s try to be really clear about how this works. Suppose your first installment worth ₹40 was made on 2 February 2023. And the second of the same amount was made on 2 March 2023. At the time of the first installment, you may have gotten a better deal—let’s say you were able to buy 60 units. But during the second the cost was higher, so you go only 20 units. The lock-in for the 60 units will end on 2 February 2026. The remaining 20 will mature on 2 March 2026. And, naturally, the amount you receive will vary.

Advantages of ELSS funds

ELSS funds come with many advantages, as you may be able to see by now. A few of them are discussed below.

1. Tax deductions

Individual investors can avail of exemptions up to ₹1,50,000 in any financial year under section 80C of the Indian Income Tax Act. This is the only tax-saving equity-related investment option that has the potential to earn higher returns.

2. Lock-in period

The ELSS scheme has the lowest lock-in period compared to other tax-saving investment options. The three-year lock-in helps you retain some liquidity.

3. Tax-efficient returns

Since the money invested in an ELSS scheme stays put for three years, all gains from this scheme will be treated as long-term gains. Returns up to ₹1 lakh will therefore be exempt from taxation.

4. Market-linked returns

The money you put into an ELSS fund flows into equity. And since the investment lock-in period is at least three years, you can manage to fetch high returns compared to tax-saving fixed deposits.

What to do after the lock-in period of ELSS ends

Sure, this fund has a minimum lock-in period of three years. But that does not mean investors have to exit the fund at the end of this period. You will have various options to choose from once the lock-in period ends. To begin with, you could start by reviewing the fund choice.

Review the fund’s performance

Investors can assess the fund’s performance for themself. They can scrutinize the portfolio of investments that the fund holds and get a fair idea of the fund’s future.

Once you have done the math and made up your mind, you will have one of two options:

1. Decide whether to stay invested

If you wish, you can opt out of the scheme after the mandatory three-year period. Doing so will not mean you lose out on past tax benefits. If you decide to stick around, you can decide how long you want to stay. Because after the lock-in, though, the fund changes into a diversified, open-ended equity-oriented scheme. So you can redeem the units whenever you want.

2. Redeem investment money

You are at liberty to redeem your investment money after the mandatory three-year period, even if you have availed tax benefits. Some investors may choose to redeem part of their investments. So they continue to stay, but with a lesser corpus. Since the mandatory period is over, you can choose to exit whenever you see fit.

Conclusion

The ELSS fund is beneficial to taxpayers. However, make sure your investments have not already reached the tax exemption limit of ₹1,50,0000.

Those investing in ELSS will have to lock up their funds for a minimum of three years. But they do have the option to extend their investment.

FAQs

Do I have to redeem my units once the ELSS lock-in period is completed?

The lock-in period is the minimum duration for which your money needs to stay with the fund. You are at liberty to redeem your units, either in full or in part, at the end of three years. After three years, you can redeem your money at any time.

What happens to my ELSS if I do not redeem it after the lock-in period?

Your units continue to generate income for you as long as you stay invested. So you have nothing to worry about after three years.

Can I exit ELSS after 3 years?

Yes, you can exit ELSS after the mandatory 3-year lock-in period. After this period, ELSS units are free to be redeemed without any restrictions.

What is 3 year lock-in period in mutual funds?

The 3-year lock-in period in mutual funds, like ELSS, restricts investors from redeeming units during this period. ELSS offers tax benefits, and after 3 years, units can be redeemed.

Can I stop investing in ELSS after 1 year?

Yes, you can stop investing in ELSS after 1 year, as ELSS funds have a minimum lock-in period of 3 years. However, you won’t be able to redeem before 3 years.

Is ELSS tax free after 3 years?

Yes, ELSS gains become tax-free after 3 years. However, if you withdraw before that, a 10% tax may apply. The mandatory lock-in period ensures long-term investment commitment.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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