Everything You Need To Know About ELSS Fund Lock-in Period

Nov 25th 2023
Mutual Fund
Thing to Know About ELSS Fund Lock-in Period

A market-linked return and tax deduction under Section 80C of the Income Tax Act, 1961 are two advantages of investing in equity mutual funds through an Equity Linked Savings Scheme (ELSS). The fund management mostly makes investments in equities and equity-related products because it is an equity fund.

Funds under Section 80C, like other investments, are required to have a lock-in period.

Everything you need to know about an ELSS fund's lock-in period will be covered in this article.

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

A lock-in period is associated with several investments. You are not permitted to sell the investment during this time. It is often a few months or years after the purchase date. The lock-in period for ELSS funds is three years.

Read More: How to Buy Index Funds Without a Demat Account?

In comparison to other investments made under Section 80C, the lock-in period for ELSS funds is the shortest:

Investment Channel Lock-in Period
ELSS Funds 3 years
Tax Saving FD 5 years
Public Provident Fund (PPF) 15 years
National Pension Scheme (NPS) Until the applicant attains the age of 60 years
National Savings Certificate (NSC) 5 years

Lock-in Period and Investment Method

There are primarily two ways to invest in ELSS funds:

Lump-sum

The lock-in period is computed starting on the day of purchase when investing in a lump amount. Therefore, regardless of the urgency, if you buy units of an ELSS fund on January 1, 2021, you cannot sell them until January 1, 2024.

SIP

You can purchase ELSS fund units through a Systematic Investment Plan, or SIP, by making modest, regular investments. The quantity and frequency of your fund investments are entirely up to you.

The SIP begins operating automatically and units are bought at the NAV on the day of debit as soon as you set up the debit mandate with your bank. When you invest through a SIP, the lock-in period is handled slightly differently.

Tax Advantages

Under Section 80C of the Income Tax Act of 1961, ELSS funds provide benefits for tax deductions. This clause states that investments in ELSS funds are eligible for a yearly tax deduction of up to Rs. 1.5 lakh.

Because there is a three-year lock-in requirement, the capital gains made from investing in ELSS funds are long-term capital gains (LTCG). The existing tax regulations exclude LTCG up to Rs. 1 lakh every financial year from taxation. The dividend that you have received is subject to taxation based on the relevant Income Tax slabs.

What Happens When The Lock-in Period Ends?

Although there is a three-year lock-in, you are not required to redeem the units once that time has passed. Following the lock-in period's expiration, the fund transforms into an open-ended, diversified equity-oriented strategy. The units are redeemable at any time.

It's crucial to keep in mind that the lock-in period will apply if you invested through a SIP and will depend on when you bought the units or when the SIP was started.

Why lock-in period is so important in ELSS Funds?

The ELSS fund lock-in period may be advantageous for the reasons listed below:

Stability and long-term focus: The lock-in period for ELSS investments promotes stability and deters rash decisions, pushing you to take a medium- to long-term investment stance that is consistent with the core idea of mutual funds as tools for building wealth over time.

Portfolio management and fund stability: The lock-in period gives fund managers a more stable pool of investments, enabling them to efficiently manage the fund's portfolio without accounting for the risk of abrupt redemption pressures or high portfolio turnover. Fund managers are better equipped to carry out their investment strategy and make well-informed judgements because to this consistency.

Investor discipline: By reducing the chance and danger of making rash decisions based on transient market volatility, the lock-in period helps you become a more disciplined investor. It promotes patience, aids in navigating market swings, and keeps investors from making snap judgements that might jeopardise their long-term financial goals.

Fund performance evaluation: The lock in provides a realistic period of time for assessing a mutual fund's performance. This allows you to evaluate the fund's performance over a reasonable period of time while accounting for market cycles and any volatility. As a result, you will be better equipped to decide whether to keep investing or redeem it when the lock-in period expires.

FAQs

What is the lock-in period for SIP Investments?

The three-year lock-in period for SIP investments is determined individually for each investment rather than starting on the day the SIP was registered. For the purposes of the lock-in period, each SIP installment is therefore treated as a single lump sum investment.

What when the lock-in period gets over?

Redeeming the money and leaving the investment early are not essential once the lock-in term expires. One can carry on with the purchase. Examine the fund's historical performance and consider how the market has affected its returns and mutual funds. To avoid paying taxes, one might reinvest the money redeemed and compare the performance of other ELSS mutual fund schemes. There is no cap on the ELSS fund. As a result, you can take the money out at any moment. Investing for five to ten years might yield high profits if no emergency fund was required.

How to redeem in an ELSS Fund?

ELSS funds can be invested in in two different ways. There are two methods: one is via lump money, and the other is through the SIP route. Your redemption process for investments varies depending on how you invest. First, let's examine the redemption process for lump sum deposits in the ELSS.

The Conclusion

It is not necessary to obtain tax advantages for your ELSS investment in order to be subject to the lock-in period. Pledged ELSS units cannot be used as collateral for loans before the lock-in period expires. The tax-saving mutual fund with the lowest lock-in duration, three years, is called ELSS. In addition to encouraging you to take advantage of equity opportunities and accumulate wealth, the lock-in period also improves the tax efficiency of your investment.

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