ELSS the Equity Linked Saving Scheme is popular for its tax-saving investment option. This long-term mutual fund offers a tax benefit under Section 80C of the Income Tax Act. It means you are allowed to claim, up to Rs. 1.5 Lakh tax deduction on this fund. But, there's a catch, this mutual fund comes with a mandatory lock-in period – of 3 years.
A lock-in period implies that you won't be allowed to withdraw your invested amount until the lock-in period expires. Once the ELSS lock-in period is completed, it is up to you whether you want to re-invest or redeem the units. Below, you will learn more about the ELSS lock-in period.
What is a Lock-in Period in ELSS?
Lock-in periods are the timelines during which you cannot redeem the purchased units. In the case of ELSS funds, this period is three years. And, this is not the only tax-saving investment with a lock-in period, check out the table below to find the shortest lock-in period:
| Investment Option | Lock-in Period |
| ELSS Funds | 3 years |
| Fixed Deposits (FDs) | Varies by deposit term (typically 1-10 years) |
| Public Provident Fund (PPF) | 15 years (with extension options) |
| National Pension Scheme (NPS) | Until retirement (at 60 years) |
| National Savings Certificate (NSC) | 5 years |
The ELSS lock-in period encourages participants to maintain long-term investment horizons, allowing fund managers to manage the portfolio more efficiently without concerns over frequent redemptions.
How Does the 3-Year Lock-in Period Work?
ELSS investments have the shortest lock-in period of 3 years among all eligible investment options under Section 80C. You cannot liquidate the investments during this period, making it the minimum lock-in time compared to other tax-saving instruments.
During the lock-in period, there is a strict prohibition on the liquidation of investments in ELSS funds. ELSS units cannot be liquidated before completing the 3-year holding period from the date of investment.
The 3-year lock-in applies to both the redemption and pledging of mutual fund units. Loans cannot be taken against ELSS units during the lock-in period.
Lock-in Period for SIP Investments
For SIP investments, the 3-year lock-in period is calculated separately for each instalment, not from the SIP registration date. Each SIP instalment is treated as a separate lumpsum investment for the lock-in period.
The 3-year lock-in period is inherent to the ELSS category, irrespective of whether the investor has availed tax benefits. This helps investors resist the temptation to redeem investments during market downturns, which can be counterproductive.
Unlike other Section 80C investment options, ELSS funds are not automatically redeemed at the end of the lock-in period. Investors can choose to continue with their ELSS investments beyond the lock-in period and must request redemption specifically.
Conclusion
With the shortest lock-in period of 3 years among eligible options and various benefits, ELSS funds are suitable for financial goals extending beyond three years. Holding investments for a longer period can help in wealth creation and achieving financial goals.
FAQs
Can I reinvest my ELSS funds?
Yes, you can reinvest your ELSS funds in several ways. By default, your earnings are reinvested back into the fund, increasing the number of units you hold (capital appreciation). Do know, that you can make additional lump sum or SIP investments into the same ELSS fund throughout the investment period.
When can I withdraw my ELSS funds?
ELSS funds have a mandatory lock-in period of 3 years from the date of investment. This means you cannot withdraw your invested amount before the lock-in period ends.
Is it risky to invest in ELSS funds?
ELSS funds invest primarily in stocks, which are inherently risky. Stock prices can fluctuate significantly, leading to potential losses in the short term. However, ELSS is suited for long-term investment horizons (ideally 5+ years) where market volatility tends to even out and offer the potential for capital appreciation.
Who should invest in ELSS funds?
ELSS can be a good option for investors who are seeking tax deductions under Section 80C of the Income Tax Act.