An Equity Linked Savings Scheme (ELSS) is a type of equity mutual fund that offers benefits from tax deductions under Section 80C of the Income Tax Act, 1961. In addition, it offers the opportunity to earn returns linked to market performance. However, your investment stays locked in this fund for 3 years and in this duration, you cannot make withdrawals. In this blog, you will understand all the important information about the ELSS lock-in period and more.
What is Lock-in Period in ELSS
Do you know what is lock-in period in ELSS? The ELSS fund lock-in period is the mandatory time frame during which investors cannot withdraw their investment in the Equity Linked Savings Scheme. For ELSS funds, this lock-in period is set at 3 years, making it the shortest among all tax-saving investments under Section 80C of the Income Tax Act.
During this time, the funds remain fixed, and investors cannot liquidate or partially withdraw their investments. The three-year lock-in period is not a random duration. It is a strategic measure designed to encourage long-term investment practices.
Although this restriction might appear as a limitation, it is intended to help investors weather short-term market fluctuations and potentially reap greater returns over time.
Why ELSS Lock-in Period is Important?
The lock-in period is crucial for both investors and mutual fund houses to preserve the advantages of investing in an ELSS. This investment scheme is designed to deliver long-term capital appreciation to investors while also offering tax benefits.
The lock-in period plays a key role in maintaining fund stability by limiting excessive withdrawals and preventing liquidity issues. It helps reduce the impact of short-term market fluctuations and build a more stable environment that supports sustainable long-term growth.
What is the Calculation Process of the ELSS Lock-in Period ?
After understanding what is ELSS lock-in period, here is the calculation process. When you invest in ELSS funds through a Systematic Investment Plan (SIP), the lock-in period is three years from the date of each SIP investment.
Each SIP instalment has its separate lock-in period. Once the lock-in period for a specific SIP instalment ends, you can redeem those units. You cannot redeem part of any specific SIP instalment before its lock-in period expires.
Assume you made three SIP investments in ELSS on the following dates:
- SIP 1: ₹8,000 on January 1, 2025
- SIP 2: ₹6,000 on February 1, 2025
- SIP 3: ₹7,000 on March 1, 2025
Each SIP has a separate lock-in period of 3 years from the date of investment such as:
| SIP No. | Investment Date | Lock-in Period Ends | Date When You Can Redeem |
| SIP 1 | January 1, 2025 | 3 Years | January 1, 2028 |
| SIP 2 | February 1, 2025 | 3 Years | February 1, 2028 |
| SIP 3 | March 1, 2025 | 3 Years | March 1, 2028 |
Lump-sum Investment Breakdown:
If you make a lump-sum investment in ELSS, the lock-in period will apply to the entire amount as a whole. For example, if you invest ₹25,000 on April 1, 2025, the lock-in period for the entire amount will end on April 1, 2028.
| Investment Date | Lock-in Period Ends | Date When You Can Redeem |
| April 1, 2025 | 3 Years | April 1, 2028 |
What Happens after the Lock-in Period in an ELSS Scheme?
Although there is a mandatory lock-in period of three years, it is not mandatory to redeem the units once this period ends. After the lock-in period, the fund transitions into a diversified, open-ended equity-oriented scheme that allows you to redeem your units at any time.
However, if you have invested through an SIP, you must note that the lock-in period will be determined by the purchase date of the units or the SIP date.
Advantages of the ELSS Lock-in Period
These are the advantages of the lock-in period of the ELSS funds:
- Duration: The lock-in period for ELSS investments is 3 years, indicating you cannot redeem or withdraw your investment before this period ends. Hence, it enables you to generate high returns in the long term.
- Commitment: You must stay committed for the entire 3-year lock-in as premature withdrawals or redemptions are not allowed.
- Tax Benefits: ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year. Additionally, long-term capital gains up to ₹1.25 lakh are tax-exempt, with gains beyond that taxed at 12.5%.
- Long-Term Investment: Designed as a long-term investment, ELSS funds benefit from compounding, where reinvested returns generate further earnings. The longer you invest, the more powerful the compounding effect becomes.
- Flexibility: After the 3-year lock-in, you can either redeem their investment or continue holding based on their financial goals.
Cons of ELSS Lock-in Period
Here are some drawbacks of the lock-in period of an ELSS Mutual Fund:
- Capped Total Benefits: Tax benefits for a financial year under Section 80C are limited to a maximum of ₹1,50,000, regardless of the total investment in an ELSS fund. For example, even if you contribute ₹10,00,000 to an ELSS fund during the current financial year, the tax benefit will only be capped at ₹1,50,000.
- Limited Tax Benefits: The ₹1,50,000 tax benefit limit under Section 80C includes all eligible deductions, such as contributions to PPF, life insurance premiums, and home loan principal repayments. Therefore, if the total deductions from these sources already reach ₹1,50,000, no additional tax benefit will be available for investments in the ELSS scheme.
Final Thoughts
Understanding the significance of the three-year ELSS lock-in period is crucial for anyone looking to invest in ELSS funds, as it plays a key role in tax-saving and wealth-building strategies. This lock-in period builds a long-term investment mindset and enables you to benefit from potential market growth while also enjoying tax deductions.
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