Understanding the Lock-In Period in ELSS Funds

 



When exploring various tax benefits and incentives available to taxpayers under Income Tax laws, one of the most provision is Section 80C. This section permits taxpayers to deduct up to Rs. 1.50 lakh from their taxable income through specific eligible payments and investments. These eligible options encompass contributions to the Public Provident Fund (PPF), life insurance premium payments, housing loan repayments, 5-year tax-saver fixed deposits, among others. 


The Equity Linked Savings Scheme (ELSS) stands out among these eligible investments. ELSS requires a minimum of 80% of its net assets to be invested in equities and equity-related instruments and has a lock-in period of three years. This focus on equity investments offers investors potential wealth creation and market-linked returns.

Advantages of ELSS Funds

ELSS is highly popular among mutual fund investors. There are 1.63 crore investor folios in ELSS funds as of June 2024. (Source: AMFI – Association of Mutual Funds in India). Here are some inherent advantages of ELSS funds:


  1. Tax Deduction


Investors can claim a tax deduction for the amount invested, up to the Rs. 1.50 lakh limit specified under Section 80C under the old regime. Investments in ELSS can be made either as a lump sum or through a Systematic Investment Plan (SIP). SIPs allow investors to spread their tax-saving investments throughout the year, reducing the pressure of making large investments in the final months. Notably, taking a tax benefit is optional when investing in ELSS funds.


  1. Lock-in Period


ELSS funds have a three-year lock-in period, the shortest of all Section 80C eligible investments. This period starts from the investment date and lasts three years, during which the assets cannot be liquidated. This feature helps investors avoid impulsive withdrawals and ensures a disciplined investment approach.


  1. Tax-efficient Returns


Capital gains from mutual fund investments are taxed only upon redemption. This makes mutual fund investments, including ELSS, more attractive than traditional Section 80C investments, where interest income is typically taxed on an accrual basis. ELSS gains are classified as Long-Term Capital Gains (LTCG) and taxed at 12.5% (plus cess and surcharge) with no indexation benefit. Additionally, LTCG of up to Rs. 1 lakh annually from equity shares and equity funds, including ELSS, is tax-free. 


  1. Market-linked Returns


Unlike other Section 80C investments that offer fixed returns, ELSS provides market-linked returns. SEBI mandates that ELSS funds invest a minimum of 80% of their assets in equity securities, offering the potential for beating inflation over long run. This makes ELSS an attractive option for investors with long-term financial goals.


  1. Potential for Wealth Creation 


Due to the predominant investment in equities, ELSS funds have the potential for wealth creation as compared to other Section 80C instruments. While risk is involved, the long-term horizon and market exposure can create significant wealth over time.


How to Invest in ELSS Funds

Investing in ELSS funds is a straightforward process:


Offline Investment

  1. Application Submission: Submit the duly filled application form at any Official Point of Acceptance of the mutual fund.

  2. Validation: An acknowledgment slip is provided after validation, and the application is processed as per the cut-off time.

  3. Investment Confirmation: The mutual fund house will confirm the investment and provide an account statement.


Online Investment

  1. Visit the Fund’s Website: Go to the mutual fund’s official website.

  2. KYC Validation: Validate the investor’s KYC status through the PAN number.

  3. Enter Investment Details: Enter details such as scheme name and investment mode (lump sum or SIP).

  4. Acknowledgment: An acknowledgment is generated and shared via email. The mutual fund house will send an account statement within few working days, which serves as proof for claiming a Section 80C deduction.


SIP Investments

  1. Register SIP Mandate: Register the SIP mandate on the bank’s net banking portal.

  2. Autopay Instructions: Set up autopay instructions for automatic deductions from the savings account. You can also generate auto mandate from UPI. 

  3. Investment Processing: The mutual fund house will process and invest the SIP installment in the specified ELSS fund.

Understanding the Lock-in Period

Lowest Lock-in Period


ELSS investments have the shortest lock-in period of three years among all Section 80C options. This period is essential for disciplined investing and helps avoid premature withdrawals.


Lock-in Period for SIP Investments


Each installment is considered a separate investment, with a three-year lock-in period starting from the respective investment date.


Not Contingent on Availing Tax Benefit


The three-year lock-in period applies regardless of whether the investor claims a tax benefit. This ensures that investors maintain their investments for at least three years, promoting long-term investment habits.


No Automatic Redemption


Unlike other Section 80C investments, which are automatically redeemed at the end of the tenure, ELSS investments do not have automatic redemption after three years. Investors must make a specific redemption request to liquidate their assets.


Conclusion

With the shortest lock-in period among Section 80C options and numerous benefits, ELSS funds are valuable for achieving long-term financial goals and wealth creation. The potential for higher returns, tax efficiency, and a disciplined investment approach make ELSS an attractive option for investors. By understanding the advantages and how to invest in ELSS funds, investors can make informed decisions and leverage these benefits for their financial growth.

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