Mrunal Manmay Dash

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 come with mandatory lock-in periods – of three years.

Many investors who dip their toes into equity markets have some ground rules that involves time in the market. It is believed equities will only benefit investors in case it is held for several years. Investors should not be perturbed by short-term stock market fluctuations as these generally smoothen out over time.

Warren Buffett, has also alluded to the virtues of long-term investing when he quipped: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”.

The Law of the Farm states that we cannot sow something today and reap it tomorrow. A realisation that all good things take time is the first step towards wealth creation.

Wealth accumulation involves two aspects; consistent addition to the corpus and a continuous compounding of this corpus.

Compounding is interrupted if we constantly tinker with the process. Lock-ins help ensure that we are constrained from doing so.

What is ELSS Lock-In Period?

Lock-in period is a particular span of time during which an investment cannot be sold or redeemed under SEBI rules; this time frame can range from a few months 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

An investor buys units of ELSS funds. The lock-in period applies to the units purchased within the ELSS funds, not the entire fund itself. Once the three-year lock-in period is over, the investor has the option to withdraw or reinvest.

There are two ways to invest in an ELSS fund; lump sum investment, and Systematic Investment Plan (SIP) investment.

In both types of investments, the lock-in period starts from the date of investment. While the lump sum ELSS has a three-year lock-in period, each SIP instalment has its own lock-in period starting from its respective investment date.

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%.