ELSS Fund Lock-in Period: The Complete Guide (2024)

An Equity Linked Savings Scheme (ELSS) is an equity mutual fund that offers tax deduction benefits under Section 80C of the Income Tax Act, 1961 along with the potential of earning market-linked returns. Being an equity fund, the fund manager primarily invests in equity and equity-related instruments.

Like most investments under Section 80C, ELSS funds also have a mandatory lock-in.

In this article, we will talk about everything that you need to know about the lock-in period of an ELSS fund.

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

Many investments come with a lock-in period. This is the period when you are not allowed to sell the investment. Usually, it is some months/years from the date of purchase. In the case of ELSS funds, the lock-in period is three years.

If we compare this to the other investments under Section 80C, ELSS funds have the lowest lock-in period:

Method of Investing and Lock-in Period

There are two methods of investing in an ELSS fund:

• Lump-Sum

When you invest in a lump sum, the lock-in period is calculated from the day the purchase is made. So, if you purchase units of an ELSS fund on January 01, 2021, then you cannot sell them until January 01, 2024, regardless of the urgency you face.

• SIP

A Systematic Investment Plan or SIP allows you to buy ELSS fund units by investing smaller amounts at regular intervals. You choose the amount and the interval at which you want to invest in the fund.

Once you set up the debit mandate with your bank, the SIP starts working automatically and units are purchased at the NAV on the date of debit. The treatment of the lock-in period is slightly different when you invest via a SIP. Here is an example to help you understand:

Let’s say that you start investing in an ELSS fund via a SIP. You choose to invest Rs.5000 on a monthly frequency. Here is a table of your purchases and lock-in periods:

Tax Benefits

ELSS funds offer tax deduction benefits under Section 80C of the Income Tax Act, 1961. According to this section, you can claim an annual tax deduction of up to Rs.1.5 lakh for investments made in ELSS funds. This translates to a saving of Rs.46,800 in taxes each financial year. However, it is important to remember that the deduction of Rs.1.5 lakh is across all investments made under Section 80C.

The capital gains earned by investing in ELSS funds are long-term capital gains (LTCG) since there is a mandatory lock-in of three years. According to the current tax laws, LTCG up to Rs.1 lakh in a financial year is exempt from tax. The dividend received by you is taxable as per the applicable Income Tax slabs.

What to Do After the Lock-in Ends?

While there is a mandatory lock-in of three years, you don’t have to mandatorily redeem the units once the lock-in period is over. After the end of the lock-in period, the fund becomes a diversified, open-ended equity-oriented scheme. You can redeem the units whenever you want.

If you have invested via a SIP, then it is important to remember that the lock-in period will be applicable based on the date of purchase of the units or the SIP date.

Here is an example to explain this:

You can stay invested if the fund is performing as per your expectations.

Key Takeaways

• ELSS funds are diversified equity-oriented mutual funds that offer tax benefits under Section 80C of the Income Tax Act, 1961.
• You can choose to invest in a lump sum or instalments via a SIP.
• All ELSS funds have a lock-in period of three years.
• Once the lock-in period ends for a particular instalment/lump sum investment, the ELSS becomes an open-ended equity-oriented investment scheme with full liquidity.