A Complete Guide to ELSS Lock in Period

Looking to invest in mutual funds that offer high returns and help you save on taxes? Then you’re probably looking to invest in ELSS or Equity Linked Saving Schemes. These funds allow you to invest based on your convenience, and you can also choose how you want to receive returns. The best part? Although these are tax-saver funds, they have the smallest lock-in period of 3 years!

In this blog, we tell you all you should know about ELSS lock-in periods. This way, you can make the most of your investments.

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

ELSS is the only open-ended fund that has a lock-in period of three years. During this period, investors cannot resell or redeem mutual fund units. That said, investors can still add money to their mutual fund during the lock-in period.

Now that you know about the ELSS lock-in period, let’s look at how you should invest in an ELSS fund.

How to invest in an ELSS fund?

Investing in an ELSS fund can be done in the same way that you use to invest in any mutual fund. The quickest and easiest way is through an Online Investment Services Account. Other ways include through a Demat account, registrar or agent.

You can either set up a Systematic Investment Plan (SIP) or deposit a lump sum in one go. SIPs are a good choice as they ensure regularity and financial discipline while also reducing the risk to capital. What’s more, you can invest as little as Rs 500 in an ELSS fund to begin your journey.

Lastly, you can claim tax benefits of up to Rs 1.5 Lakhs on your annual taxable income under Section 80C of the Income Tax when investing in an ELSS fund. This convenient feature of ELSS funds is the reason these are also called tax-saving schemes.

ELSS benefits: Taxation

Investors investing in ELSS funds benefit from tax deductions. According to Section 80 C of the Income Tax Act 1961, investors can claim an ELSS deduction of up to Rs. 1.5 lakhs. Remember that the tax deduction is across all investments made under Section 80C regulations.

Apart from the ELSS deduction, as per Section 80C, the capital gains earned from the investment fall under Long Term Capital Gains (LTCG) given the ELSS fund lock-in period of three years. This means they are eligible for taxation under the current tax laws. So, the LTCG up to Rs. 1 lakh per financial year is exempt from taxation. But your dividend is still taxable based on your income tax slab.

Along with knowing the ELSS funds tax benefits, you also need to know how to redeem your funds.

What to do after the ELSS mutual fund lock in period ends

ELSS mutual funds become open-ended equity-oriented schemes after the three-year lock-in period. This means you can redeem units whenever you want. Alternatively, you can review the fund’s performance, re-invest the total amount redeemed, and save tax.

FAQs

Do I HAVE to redeem my units once my ELSS lock-in period is completed?

No, you don’t have to redeem your ELSS units once the lock-in period ends. Once the lock-in period is over, the fund becomes an open-ended, diversified, equity-oriented scheme.

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

If you don't redeem your ELSS after the lock-in period, your investment continues to grow, and you can choose to redeem or transfer it at any time based on your financial goals and market conditions.

Should I redeem my ELSS after lock-in and invest that sum in another ELSS for tax benefits?

Redeeming your ELSS after the lock-in period and reinvesting in another ELSS can help maintain tax benefits. However, consider your financial goals and market conditions before making such decisions. Consult a financial advisor for personalised advice.