What Is The Elss Lock-In Period?
Introduction
When asked about mutual funds and taxes, you might think of Equity Linked Savings Scheme (ELSS). It is one of the most popular mutual fund schemes that helps achieve the dual objective of wealth creation and reducing tax outgo. ELSS investment allows you to claim tax deductions up to INR 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. However, despite being an open-ended fund, ELSS is subject to a minimum lock-in period of three years. This article delves into the intricacies of the ELSS lock-in period to help you make an informed investment decision.
What is the ELSS lock-in period?
Most investments like the Public Provident Fund (PPF), National Pension Scheme (NPS), tax-saving fixed deposits, etc. come with a lock-in period. It refers to the period during which you cannot redeem or withdraw your investments. The purpose of the lock-in period is to encourage long-term investments.
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Lock-in periods can range from a few months to a few years from the purchase date depending on the scheme you pick. ELSS is also subject to a three-year lock-in period which is the lowest among the other tax-saving investment vehicles under Section 80C.
How does the ELSS lock-in period work?
You can invest in ELSS via lump sum investment and a Systematic Investment Plan (SIP). Let’s understand how the lock-in period works in both methods.
- Lump sum investment
In this method, you invest a lump sum to buy units of the fund. The lock-in period begins from the date of purchase. So, you gain the freedom to redeem all the units after completing the lock-in period of three years from the date of investment made.
For example, 1000 units purchased on February 1, 2020, through lump sum investment can be redeemed only after February 1, 2023.
- SIP investment
You can also choose the SIP route to invest in an ELSS fund. This method allows you to purchase ELSS units at regular intervals. You can choose the investment amount and intervals according to your convenience. In this case, each SIP instalment is subject to the lock-in period from the date of investment. You can redeem each SIP investment only three years after the instalment is completed. So, the SIP route does not allow you to redeem all units of the fund at once.
For example, you invest INR 5000 in ELSS via the SIP method every month. The table below explains how the lock-in period will vary with the date of purchase of the units:
| Date of purchase | Completion of the lock-in period |
| February 1, 2020 | February 1, 2023 |
| March 1, 2020 | March 1, 2023 |
| April 1, 2020 | April 1, 2023 |
| May 1, 2020 | May 1, 2023 |
| June 1, 2020 | June 1, 2023 |
Lock-in period ends: What are the available options?
Once the three-year lock-in duration ends, the ELSS fund becomes open-ended. This means you can redeem some or all of the units held whenever you want. However, redeeming your investment and exiting the scheme after three years is not mandatory. You can continue to hold onto your investments for long-term wealth generation. You can also reinvest the redemption amount. However, it is essential to analyse the fund’s performance and market condition before making a decision.
Importance of ELSS lock-in period
- The lock-in period in ELSS discourages you from impulsive decision-making and encourages medium to long-term investment
- The ELSS lock-in period provides a stable investment pool to fund managers. This helps in the effective management of the portfolio without the pressure of frequent redemptions
- The ELSS lock-in period also provides you sufficient time to evaluate a fund’s performance. This helps in making informed decisions regarding redemption or holding your investments after the lock-in period ends
- Lastly, the lock-in period in ELSS makes you more patient and disciplined in your investment approach
Wrapping up
Several investment options under Section 80C of the Income Tax Act, 1961, can help you save on taxes. However, all of these have a lock-in period, which means you cannot redeem or withdraw your investments before a predetermined tenure. ELSS has the lowest lock-in duration, offering the highest liquidity among Section 80C-eligible investment options. This makes it a viable choice if you have a high-risk appetite and you want to achieve your financial goals while saving on taxes.
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