ELSS Lock-in Period: How Does 3 Year Lock In Period Work?

ELSS (Equity Linked Saving Scheme) is a popular mutual fund that offers tax benefits under Section 80C of the Income Tax Act, allowing investors to claim deductions of up to Rs. 1.5 lakh on investments in this fund.
Like most investments under this section, ELSS funds too comes with mandatory lock-in periods – of three years.With this guide, we will explore the intricacies of the ELSS lock-in period . But first, let us undestand what it is.

Lock-in periods are periods during which an investment cannot be sold or redeemed under SEBI rules; this time frame can range from a few month to a few years. In the case of ELSS funds, the lock-in period is of three years.Significantly, this lock-in period is shorter than that of other tax-saving options under section 80C, as shown below:

• ELSS funds: Three years
• Fixed deposits: Five years
• Public Provident Fund (PPF): 15 years
• National Pension Scheme (NPS): Until investor turns 60 years
• National Savings Certificate (NSC): Five years

Also Read: ELSS Vs PPF - The Better Tax Saving Option for You The ELSS lock-in period encourages partipitants to keep long-term investment horizons, while helping fund managers to manage the fund's portfolio more efficiently without having to worry about frequent redemptions.

As an investor, you buy units of ELSS funds. The lock-in period applies to the units you purchase within the ELSS funds, not the entire fund itself. Once thethree-year lock-in period is over, you have the option to withdraw or reinvest.Here are two ways to invest in an ELSS fund: lump sum investment, and SIP investment.

• The lock-in period starts from the date of investment.
• During the three-year lock-in period, no redemption of units or withdrawal of the invested amount is allowed.
• After the completion of the lock-in period, investors gain the freedom to redeem the units partially or in full.

• Each SIP instalment has its own lock-in period starting from its respective investment date.
• Redemption restrictions apply to each SIP instalment during its lock-in period, prohibiting early withdrawals.
• As each SIP instalment completes its three-year lock-in period, investors can redeem the investment associated with that unit.

1. Lump sum investment You can make a lump sum in an ELSS fund. Remember, the following conditions come into play:
2. Let us understand it through an example; Mr. X decides to buy 1,000 units of ELSS fund at NAV of 200. The total investment required would be Rs. 2 lakh.On the completion of the lock-in period, Mr X can either withdraw the amount in full or partially as he deems fit.
3. SIP investment Mr X could also take the Systematic Investment Plan (SIP) route. When investing in ELSS funds through SIP, the following conditions come into play:
4. In this example, Mr. X decided to invest in a systematic investment plan, whereby each investment will be considered a separate investment in ELSS, with its own lock-in periods shown in the table above.

Also Read: Lump Sum Vs SIP Which is Better Option For ELSS

ELSS funds are widely regarded as one of the best investment options for claiming tax benefits under Section 80C. The three-year lock-in period encourages long-term wealth creation and discipline.Here are some benefits of investing in ELSS mutual fund on account of the lock-in period:

1. Encourages patience The lock-in period prompts investors to adopt a long-term investment horizon. This encourages staying invested for a significant period, which can potentially lead to higher returns.
2. Creates wealth Equity investments tend to perform better over the long term. By investing in ELSS funds and staying committed to the lock-in period, investors have better potential of wealth creation.
3. Tax benefits ELSS funds provide tax benefits under the Section 80C of the Income Tax Act. Investments of up to Rs. 1.5 lakh in ELSS funds are eligible for a deduction. The excess investments over Rs 1.5 lakh do not qualify for deductiion. It is important to note that the gains above Rs 1 lakh realized upon redemption after the lock-in period will attract long-term capital gains tax at the rate of 10%.
4. Skirts volatility The lock-in period prevents investors from engagin g in impulsive trading decisions that can get triggered by short-term market volatility. Lock-in promotes a disciplined investment approach and discourages frequent buying and selling of fund units.

Also Read: What Are Tax Implications On ELSS?

The lock-in period for ELSS funds lasts for 3 years from the date of your investment. To find out when it ends, simply add 3 years to the date you invested. If you invest through SIP, consider each installment as a separate investment with its own lock-in period.Once the lock-in period is over, you have some options. First, check how well your ELSS funds have performed and if they have grown nicely. If they show profitable growth, you can choose to keep your money invested even after the 3 years. Alternatively, you can redeem your earnings and the fund, and also enjoy tax benefits.

ELSS funds come with a mandatory lock-in period of three years. Once this lock-in period ends for a particular installment or lump sum investment, the ELSS transforms into a fully liquid and open-ended equity-oriented investment scheme.

During the three-year lock-in period of ELSS funds, short-term financial gains cannot be realized. Only long-term capital gains can be achieved. Long-term capital gains up to Rs 1 lakh per year are tax-free, while gains exceeding this amount are subject to a 10% LTCG.

During the lock-in period, investors must consider certain factors to save themselves from the probable risks associated with the ELSS funds, and take steps to shield themselves. Let is take a look at some of these measures:

• Ensuring liquidity and access to funds: It is important to ensure sufficient liquidity for any unforeseen financial needs during the lock-in period. Investors should plan their investments accordingly and maintain an emergency fund outside the ELSS funds.
• Preparing for changes in crises: In case of changes in financial goals or emergencies, investors cannot access their ELSS funds before the completion of the lock-in period. Hence, it is essential to align investment objectives and risk tolerance with the lock-in period.
• Strategies for managing the lock-in period effectively: Investors can adopt strategies like systematic investment plans (SIPs) to stagger their investments over multiple financial years. This approach ensures that funds become eligible for redemption after the completion of the respective three-year lock-in periods.
• Tracking fund performance evaluation during lock-in period: While investors cannot redeem their ELSS fund units during the lock-in period, it is still essential to monitor the performance of the scheme. This evaluation helps in making informed decisions about continuing with the fund or switching to a different scheme after the lock-in period.

Also Read: How to Select The Best ELSS Mutual Fund

Given below are two considerations to take note of:

• Applicable exemptions or exceptions to the lock-in period: In certain cases, such as the demise of the investor or in situations of critical illness or disability, an exception may be made to the lock-in period.
• Impact of switch options and dividend reinvestment: Switching between different schemes within the same fund or opting for dividend reinvestment does not affect the lock-in period. The three-year lock-in is still applicable to the initial investment.

Understanding thethree-year lock-in period is vital for investors considering ELSS funds as a tax-saving and wealth-creation avenue. The lock-in period encourages a long-term investment approach, allowing investors to potentially benefit from market growth and enjoy tax benefits . While the lock-in period restricts immediate access to funds, it promotes financial discipline and discourages hasty investment decisions based on short-term market volatility.It pays to be aware of the dos and don’ts to navigate the lock-in period, which can be relaxed under specific conditions, though it is advisable to consult with a financial advisor for better insight.By understanding and navigating the lock-in period effectively, investors can maximise the advantages offered by ELSS funds and align their investment strategy with their financial goals.
And as always, seek guidance from a financial expert.