ELSS Fund Lock-in Period- ELSS, or Equity Linked Savings Scheme, is a popular investment option in India that offers the dual benefit of tax savings and wealth creation through equity investments. As the only equity mutual fund that qualifies for tax deductions under Section 80C of the Income Tax Act, 1961, ELSS has become a favorite among tax-conscious investors who also want market-linked returns.
However, like most tax-saving investments, ELSS comes with a mandatory lock-in period. In this complete guide, we’ll explain everything you need to know about the ELSS lock-in period in simple English.
What is the Lock-in Period in an ELSS Fund?
The lock-in period is applicable for “Lock-in period” refers to a period within which you are not allowed to sell or redeem your investment. With respect to an ELSS fund, a “lock-in period” of 3 years applies. This means that after investing in an ELSS fund, you will not be able to withdraw your funds, even in the event of a financial crisis.
Why Does ELSS Have a Lock-in Period?
The lock-in period serves two purposes:
- Encourages Long-Term Investing: It prevents investors from making impulsive decisions during market volatility and helps them stay invested long enough to benefit from compounding.
- Government Requirement: Since ELSS offers tax benefits under Section 80C, the government mandates a lock-in to prevent misuse of the tax deduction facility.
ELSS Lock-in Compared to Other Section 80C Investments
One of the biggest advantages of ELSS is that it has the shortest lock-in period among all tax-saving investment options under Section 80C. Here’s a quick comparison:
| Investment Option | Lock-in Period |
|---|---|
| ELSS Funds | 3 years |
| Tax Saving Fixed Deposit | 5 years |
| National Savings Certificate (NSC) | 5 years |
| Public Provident Fund (PPF) | 15 years |
| National Pension Scheme (NPS) | Until age 60 |
As you can see, ELSS offers relatively quick liquidity compared to other tax-saving instruments, making it attractive for investors who don’t want their money locked away for too long.
How Lock-in Works Based on Investment Method
The way the lock-in period is calculated depends on how you invest in ELSS—whether as a lump sum or through a Systematic Investment Plan (SIP).
Lump Sum Investment
When you invest a lump sum amount in ELSS, the lock-in period is straightforward. It starts from the date of purchase and ends exactly 3 years later.
Example:
If you invest ₹50,000 in an ELSS fund on January 1, 2021, you cannot redeem those units until January 1, 2024, no matter what happens.
SIP Investment
A Systematic Investment Plan (SIP) allows you to invest smaller amounts regularly—usually monthly. With SIP, the lock-in period applies separately to each installment.
Example:
Let’s say you start a monthly SIP of ₹5,000 in an ELSS fund. Here’s how the lock-in works:
| Date of Purchase | Amount Invested | NAV | Units Purchased | Lock-in Ends On |
|---|---|---|---|---|
| Jan 1, 2021 | ₹5,000 | ₹55 | 90.91 | Jan 1, 2024 |
| Feb 1, 2021 | ₹5,000 | ₹43 | 116.28 | Feb 1, 2024 |
| Mar 1, 2021 | ₹5,000 | ₹58 | 86.21 | Mar 1, 2024 |
| Apr 1, 2021 | ₹5,000 | ₹38 | 131.58 | Apr 1, 2024 |
| May 1, 2021 | ₹5,000 | ₹50 | 100.00 | May 1, 2024 |
As you can see, each SIP installment has its own 3-year lock-in period starting from the date of that particular investment. So your first installment becomes available for withdrawal on January 1, 2024, the second on February 1, 2024, and so on.
This staggered unlocking is actually beneficial—you get gradual access to your money instead of having everything locked until one far-off date.
Tax Benefits of ELSS
The lock-in period is tied to the tax benefits ELSS offers. Here’s what you need to know:
- Tax Deduction Under Section 80C
You can claim a tax deduction of up to ₹1.5 lakh per financial year for investments made in ELSS funds under Section 80C. If you’re in the 30% tax bracket, this translates to a tax saving of up to ₹46,800 per year (including cess).
Important Note: The ₹1.5 lakh limit is a combined limit for all Section 80C investments, including PPF, NSC, life insurance premiums, home loan principal, and ELSS.
- Tax on Returns
Since ELSS has a mandatory 3-year lock-in, all gains are classified as Long-Term Capital Gains (LTCG). Here’s the tax treatment:
- LTCG up to ₹1 lakh per year: Tax-free
- LTCG above ₹1 lakh per year: Taxed at 10% (without indexation benefit)
- Dividends: Taxed as per your income tax slab
This makes ELSS fairly tax-efficient compared to other investment options.
What Happens After the Lock-in Period Ends?
Once the 3-year lock-in period is over, your ELSS fund essentially becomes a regular open-ended equity mutual fund. You have complete freedom to:
- Redeem Your Units: Withdraw your money partially or fully as per your financial needs.
- Stay Invested: Continue holding the investment if the fund is performing well and you want to benefit from further growth.
- Switch Funds: Some investors choose to redeem and reinvest in other mutual funds based on their changing goals.
Important for SIP Investors: Remember that if you invested via SIP, each installment unlocks separately after 3 years. You don’t have to redeem everything at once—you can redeem specific installments as they become eligible.
Can You Withdraw ELSS Before 3 Years?
No. The 3-year lock-in is mandatory, and there are no exceptions—not even for emergencies like medical expenses, job loss, or financial hardship. This is one of the key disadvantages of ELSS, so it’s crucial to invest only money that you won’t need in the short term.
Pro Tip: Always maintain a separate emergency fund in liquid assets (like savings account or liquid funds) before locking money into ELSS.
Should You Stay Invested After Lock-in?
This depends on several factors:
- Fund Performance: If the fund has been delivering good returns and is well-managed, it makes sense to stay invested.
- Your Financial Goals: If you’ve achieved your goal or need the money, you can redeem. If not, staying invested helps you benefit from compounding.
- Market Conditions: If markets are down when your lock-in ends, you might want to wait for recovery before redeeming.
Many financial advisors suggest staying invested beyond the lock-in period if the fund continues to perform well, as equity investments generally deliver better returns over longer periods.
Key Takeaways
- ELSS funds have a mandatory lock-in period of 3 years—the shortest among all Section 80C tax-saving options.
- For lump sum investments, the lock-in is 3 years from the date of investment.
- For SIP investments, each installment has its own 3-year lock-in from the date of that particular investment.
- You can claim tax deduction up to ₹1.5 lakh per year under Section 80C.
- After the lock-in ends, ELSS becomes an open-ended equity fund with full liquidity.
- You cannot withdraw ELSS before 3 years under any circumstances.
Final Thoughts
ELSS has a lock-in period of 3 years, which can be regarded both as an advantage and a limitation. While it hampers liquidity, it aids in disciplined investing in the long run, which is required for creating wealth through equity markets.
Along with various benefits, it can be regarded as one of the best tax-saving investments that an Indian can make. Just be sure to put in money that you won’t need access to for at least 3 years, and be very selective in choosing your ELSS Mutual Fund.
Learn More:
