Equity Linked Savings Schemes (ELSS) are equity mutual funds that offer certain tax benefits under Section 80C of the Income Tax Act. They are a popular choice among investors looking to save taxes as they provide high returns and have the shortest lock-in period among tax-saving instruments.
In the following sections, we will cover the details of the lock-in period of ELSS.
What Are ELSS Funds?
ELSS Mutual Funds are open-ended mutual funds that invest at 80% of their total assets in stocks and equity-related instruments. These are the only mutual funds that offer any tax benefit. You can claim tax deductions of up to Rs. 1.5 lakh under Section 80C for investments in ELSS.
Returns from investments in ELSS are not guaranteed as these mutual funds primarily invest in stocks. The performance of ELSS funds depends on the market conditions. However, if you stay invested for an extended period, you are more likely to get the best returns. Most experts suggest that investors looking to allocate funds to ELSS should have a long-term investment horizon.
These equity funds are a popular option for their dual benefits of tax savings and inflation-beating returns. Historically, they have earned double-digit returns on average over a long investment period. Moreover, as noted above, ELSS mutual funds have a lock-in period of three years, which is the lowest among tax-saving investments, such as PPF (15 years), NSC (5 years), and tax-saving FDs (5 years).
ELSS mutual funds invest in large cap funds and mid-cap stocks to increase diversification. Few of these funds also have little exposure to fixed income instruments to mitigate portfolio risk. Note that there is no maximum investment limit for ELSS.
What Is a Lock-in Period, and How Does It Work for ELSS?
Various financial instruments like close-ended mutual funds, ELSS funds, hedge funds, tax-saving Fixed Deposit, PPF, etc., come with lock-in periods. You cannot redeem or sell your investments during this period. However, once this period ends, you can sell your investments.
Lock-in periods for mutual funds are not uncommon. All close-ended mutual funds come with a lock-in period extending from 3 to 5 years. Close-ended funds place restrictions on both the entry and exit of investments. This prevents investors from redeeming returns on a short-term basis to get high potential returns.
Open-ended mutual funds do not come with a lock-in period. Instead, most of these funds impose an exit load for redemption within a year. Equity Linked Saving Schemes are the only exception to this rule.
The lock-in period of ELSS funds is three years. Investors can redeem their investments only after this period, and there are no provisions for premature withdrawals. More Indians will be encouraged to invest in the country’s equity market.
The following are the lock-in periods of some investments u/s 80C:
- Equity Linked Savings Scheme (ELSS): 3 years
- National Savings Certificate (NSC): 5 years
- Tax-saving Fixed Deposits (FDs): 5 years
- Employees’ Provident Fund (EPF): 5 years
- Public Provident Fund (PPF): 15 years
- Sukanya Samriddhi Yojana (SSY): 21 years
- National Pension Scheme (NPS): Till the investor turns 60 years
Why Is the Lock-In Period for ELSS Investments Important?
The following are some of the reasons why ELSS funds impose the lock-in period:
- To impart stability: One of the main reasons for the lock-in periods in mutual funds like ELSS is to make it more stable. Excessive selling by many investors can cause liquidity issues for a fund, which would impact its performance. Moreover, frequent changes in the total investment can affect the fund’s equilibrium.
- Offers more benefits for investors: The lock-in period for ELSS prevents investors from selling their units, which keeps the fund’s assets stable. This is also beneficial for investors as many tend to overreact to minor market corrections. A lock-in period ensures that investors cannot exit early. Accordingly, one can reap the benefits of long-term investment.
- To encourage more investments: The Government of India offers tax benefits for investing in specific instruments with lock-in periods like ELSS. ELSS was launched to promote more new investors to enter the stock market and stay invested long-term. More investments strengthen the economy of a country.
Calculation of Lock-in Period for ELSS
Here is how you can calculate the lock-in period for mutual funds with different investment modes.
-
For lump sum investment
In a lump sum investment, you invest a large sum of money to purchase units of a mutual fund scheme. Investors with a high-risk tolerance and high investment amount can invest via the lump sum rote to benefit from market lows.
The lock-in period for a lump sum investment starts from the day of purchase. For example, if you purchase units of an ELSS on May 26, 2022, you can sell your investments after May 26, 2025.
-
For SIPs
Systematic Investment Plans (SIP) allow you to pump money into your preferred mutual fund at intervals of your choice (daily, monthly, or yearly). You can start investing in an ELSS with as little cash as Rs. 500 per month. Small investors can use SIPs to grow their wealth in a disciplined manner.
The lock-in period of ELSS investments is different for SIPs as you keep investing every week, month or year. In this case, the lock-in period is applicable from the date of purchase of every installment.
Let us say that you started a SIP of Rs. 4,000 per month in an ELSS on May 26, 2022. The following is a list of lock-in periods:
| Date of Each SIP Instalment | Lock-in Period Ends on |
| May 26, 2022 | May 26, 2025 |
| June 26, 2022 | June 26 ,2025 |
| July 26, 2022 | July 26,2025 |
| August 26, 2022 | August 26, 2025, |
| September 26, 2022, | September 26, 2025 |
What to Do after the Lock-in Period of ELSS Ends?
Here are some of the things you can do when the lock-in period ends:
-
Review the fund’s performance
ELSS investments not only help with saving taxes but also can offer long-term capital appreciation. However, many investors tend to forget this and invest in another ELSS for their tax benefit. You will want to avoid this, as you will not be able to get its full benefits.
Instead, you can consider continuing your investment for another few years. You can assess the fund’s historical risk-adjusted returns for the past 5-10 years. It is also good to compare its performance with funds in a similar category.
-
Decide whether to stay invested
After the end of the lock-in period of the ELSS fund, you will want to decide if you wish to stay invested or not. If the fund has underperformed, try to find out its reasons.
If the market was under a bear phase, the fund manager could not have helped much. On the other hand, if they made the wrong calls, you will want to redeem your units and invest elsewhere.
-
Redeem your investments.
If your investment is performing well, it’s unnecessary to redeem it after the lock-in period. Although many people redeem their investments after three years, you should redeem them only if you encounter a real need like a medical emergency or a sudden travel plan.
Most experts advise investors to exit ELSS only when they are about to reach their financial goals or if the fund underperforms. You can also partially redeem your investment instead of entirely exiting it. There is no exit load applicable in this case.
Final Word
Equity Linked Savings Schemes are ideal for those looking for tax savings and creating wealth. You can use it to save up to Rs. 1,50,000 in taxes in a financial year while getting the chance to make the highest returns among similar investments. The lock-in period of ELSS is also the lowest among tax-saving investments, but you can stay invested for a longer period.
Start investing now in ELSS with Kuvera and select funds from various options after checking their performance history.
Frequently Asked Questions
-
How do I find ELSS funds to invest in Kuvera?
With Kuvera, you can save up to INR 46000 in taxes with ELSS fund investments. Go to the Kuvera website or app and select the option, ‘Invest’ from the menu. You can then select, the ‘ELSS’ option. A list of options will be displayed. You can select each ELSS fund and estimate its financials before deciding to invest.
-
Does Kuvera have any tax-saving feature?
Kuvera’s unique tax-saving feature is tax-harvesting. You can use this feature to realize a Long Term Capital Gain (LTCG) of up to INR 1 lakh each financial year without paying any taxes. Kuvera keeps track of your portfolio and recommends transactions as needed. You initiate the transactions. Our recommendation is to buy and sell the fund(s) on the same day so the NAV impact is minimized.
-
What taxes are applicable on capital gains earned from ELSS?
Only long-term capital gains (LTCG) tax is applicable on ELSS due to the three-year lock-in period. As their holding period exceeds 12 months, a 10% tax rate is applicable on LTCG above Rs. 1 lakh. Short-term capital gains (STCG) tax is not levied on ELSS.
-
How long should you stay invested in ELSS funds?
Like any other equity investment, ELSS does not offer guaranteed returns as its performance depends entirely on that of the market. However, when you stay invested for a long period, you can get high returns as it mitigates market volatility. You might want to stay invested for 5 years or more to get the best returns.
-
How do investments in ELSS compare with PPF?
Public Provident Fund (PPF) is a safe investment scheme offered by the Central Government with a lock-in period of 15 years. On the other hand, ELSS has a much shorter lock-in period of 3 years.
PPF investment falls under the EEE (exempt, exempt, exempt) category offering tax savings on the yearly contribution (u/s 80C), interests, and proceeds on maturity. ELSS investments only offer tax deductions against the investment made during a financial year under Section 80C.
-
Which is the better investment method — SIP or lump sum?
SIP (Systematic Investment Plan) allows you to regularly invest as little as Rs. 500 in your chosen mutual fund. So, if you have small but regular sums for savings, you can invest via a SIP.
In contrast, lump-sum investments are suitable for those with a bulk amount to invest and are willing to deal with market-related risks. They are ideal when the market rates are low.
-
How can I redeem units of my ELSS investment?
You can redeem units of an ELSS fund after completing the three-year lock-in period. To redeem the units, place a redemption request with the fund house. After your transaction is processed, you will receive the money at the prevailing NAV (Net Asset Value).
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch/hear on YouTube:
Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabseSahiHai!
