ELSS Lock-in Period: A Complete Overview

Rajesh Kumar Kar
Jul 15
6 min read

You must be searching for various tax-saving strategies to lessen the burden associated with taxes as a taxpayer. One of the significant ways for Indian taxpayers to save money on taxes is through the Equity Linked Savings Scheme. ELSS are equity-based mutual funds that provide a range of tax advantages under Section 80C of the Income Tax Act. Compared to most other tax-saving options, these plans offer better returns and a shorter lock-in period, making them a popular choice for investors to lower taxes. To find out more about the ELSS lock-in time and its advantages, continue reading this post.

What is Lock-In Period in ELSS
Importance of ELSS Lock-In Period
Lock-In Period and Investing Methods
Calculation of Lock-In Period
What to Do After the End of the Lock-In Period
Conclusion
Frequently Asked Questions

What is Lock-In Period in ELSS

The ELSS lock-in period prevents investors who bought the funds from redeeming their units until three years following the date of purchase. The number of units invested determines the redemption. There are two types of mutual funds: open-ended and closed-ended. ELSS is the only open-ended mutual fund with a minimum lock-in time of three years. Closed-ended mutual funds always have a lock-in period. The lock-in period applies to both SIP plans and lump-sum investments.

Importance of ELSS Lock-In Period

The lock-in period requires being followed by mutual fund houses and investors alike to preserve the advantages of ELSS investing. The goal of this investment plan is to give investors long-term capital growth returns while also offering tax advantages. This lock-in period is crucial for maintaining fund stability and preventing liquidity problems by restricting withdrawals and excessive selling, which increases the chances of stability and reduces short-term market swings within the funds while encouraging long-term, sustainable growth.

Lock-In Period and Investing Methods

There are two options for investing in ELSS funds:

Lump Sum: Units of a mutual fund plan get purchased with a substantial lump sum investment. Investors with significant resources and a high risk tolerance often choose this technique to earn profit from market downturns. A lump sum investment's ELSS Lock-in Period, which starts on the day of purchase, prohibits the invested amount from being sold or redeemed until the Lock-in Period has elapsed.
SIP: You can purchase units of ELSS funds by selecting a Systematic Investment Plan, which allows you to make smaller, more frequent investments at pre-arranged periods. The amount invested and the frequency of fund contributions are also negotiable. The SIP gets initiated automatically, and units are bought at the Net Asset Value (NAV) on the debit date as soon as you create a debit mandate with your bank. When investing through SIP, the ELSS Lock-in Period is handled significantly differently.

Calculation of Lock-In Period

After three years from the date of the initial investment, the lock-in period of lump sum investments expires.

An Illustration to clarify

Assume that you invested in ELSS through SIP on the dates and quantities listed below.

SIP 1: January 1, 2025, Rs 5,000

SIP 2: February 1, 2025, Rs 5,000

SIP 3: March 1, 2025, Rs 5,000

There will be a distinct 3-year lock-in term for each SIP.

Each SIP instalment is subject to lock-in separately. For example, if a person invests Rs 5,000 each month, each instalment will have a 3-year lock-in term from the date of investment. You can redeem the units from any instalment once the three-year lock-in term has passed. You must wait until the whole three years for each SIP instalment to be redeemed; you cannot redeem a portion of an instalment before the lock-in period expires. Assume you invest Rs 20,000 in ELSS as a one-time payment on April 1, 2025. The lock-in period for the full amount in this scenario would be April 1, 2028, considering a three-year lock-in period.

What to Do After the End of the Lock-In Period

It is not necessary to withdraw from the investment and redeem the money after the lock-in period has passed. It is possible to continue investing in the same mutual funds by evaluating their performance, investment strategy, and market consequences. To save taxes, one might move the units to other funds after comparing the performance of comparable ELSS mutual fund schemes. As a result, you can transfer or redeem units at any time, making the ELSS an open-ended fund. If an emergency fund is not required, investing for five to ten years will yield steady profits.

Conclusion

Accordingly, it provides an excellent option for anyone looking to build wealth and save taxes, as indicated by the ELSS lock-in term. Up to Rs. 1,50,000 in tax savings can be obtained within a financial year by investing in ELSS, which also offers the potential for greater returns than comparable investment options. Among tax-saving options, ELSS has the shortest lock-in Period, giving you the option to stay invested for an extended period if you'd like.

Frequently Asked Questions

What happens to ELSS after 3 years?

A three-year lock-in period is applicable to ELSS funds. When this lock-in period for a specific payment or lump sum investment expires, the ELSS becomes an open-ended, fully liquid, equity-oriented investment plan.

Are ELSS returns exempt from taxes after 3 years?

The three-year lock-in period of ELSS funds precludes the possibility of short-term financial benefits. It can only result in long-term capital gains. It can only result in long-term capital gains. Up to Rs 1 lakh in annual long-term capital gains are tax-free; gains over this level are subject to 10% LTCG.

What should you do after the maturity of the lock-in period?

Determine the value and growth of your ELSS investment after the three-year lock-in period is over to decide whether to proceed or consider other options. You can either hold onto your investment for long-term objectives or redeem units for liquidity. Consider potential tax implications and capital gains. Reinvest in various ways or transfer your funds based on your objectives. For optimal returns on your ELSS investment, review and adjust your plan frequently.

What is the mutual fund lock-in period?

The lock-in period is the minimum time that investors have to retain their investment; during that time, they are not permitted to redeem or sell mutual fund units.

What is the lock-in period for tax-saving mutual funds?

Tax-saving mutual funds, commonly referred to as Equity Linked Savings Schemes (ELSS), have a three-year lock-in period.

How to break the mutual fund lock-in period?

Mutual funds with a lock-in term do not allow early withdrawals, unlike fixed deposits or other flexible investments. You are required to remain invested in such a plan, such as an ELSS or a closed-ended fund, until the conclusion of the lock-in term.

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

Returns will flow in from the ELSS fund. The fund changes into a standard open-ended equity scheme after the lock-in period, giving you the freedom to redeem at any time.

Should I redeem my ELSS after the lock-in period and invest the amount in another ELSS?

You must consider the fund's performance, objectives, and needs and only redeem units if you're not satisfied. Evaluate exit loads and any applicable taxes as well.

Is it necessary to sell my ELSS units once the lock-in period ends?

After the ELSS Lock-in Period is over, you are under no duty to sell your ELSS units. Depending on your preference and the fund's performance, you can decide whether to redeem or keep the units.

How can I break a three-year lock in of a mutual fund?

Due to regulatory requirements, investors are unable to redeem or withdraw their assets from ELSS funds during the three-year lock-in period. Investors may submit a redemption request to their mutual fund business online or through the channels the fund house enables once the lock-in period has ended. The investor's bank account gets credited with the redemption funds.

What happens if you sell ELSS before the completion of the lock-in period?

Selling ELSS before the end of the three-year lock-in term is not a possibility. You will be unable to redeem before the lock-in term expires, and if you wish to make additional investments, you will need to accumulate a sizeable corpus.