Your ELSS Lock-In Period is Over! What's Next?
If you've successfully completed the lock-in period for your Equity Linked Saving Scheme (ELSS) investment, congratulations on this exciting milestone! You have some newfound flexibility with your funds. With the lock-in period behind you, let’s look at some of the steps you can take.
Here's the important considerations and options available to you after your ELSS lock-in period concludes.
What to do after the ELSS lock-in period ends?
While there is a minimum mandated lock-in period of three years with all ELSS funds, there is no requirement on having to redeem those units after the lock-in period ends. Which essentially means that after the lock-in period ends, your fund becomes similar to an open ended and equity-oriented scheme. So, you can redeem the units at any time, after the lock-in period concludes.
One of the reasons ELSS funds have a lock-in period is for tax purposes. As tax-saving instruments, ELSS are intended to encourage long-term savings. ELSS funds are further subject to tax benefits under section 80C of the Income Tax Act.
How to redeem your ELSS Investment?
You can redeem your ELSS investment by raising a redemption request online or in-person. You should also keep in mind that there are two ways to invest in an ELSS, via an SIP or as a lump sum.
Redeeming lump sum investments from an ELSS
If you have invested via a lump sum amount, the lock-in period is calculated from the day the purchase was made. For example,
- If you make a lump sum investment of ₹70,000 in an ELSS scheme on 10 April 2020,
- You can redeem all your ELSS units together after three years, which would be on 11 April 2023, which is when the lock-in period would end.
Redeeming SIPs from an ELSS
Each SIP instalment is like a new investment and each instalment has a corresponding 3-year lock in period. For example,
- If you start your monthly SIP of ₹10,000 in an ELSS on 1 April 2020,
- You‘ll be able to redeem that investment on 2 April 2023.
- Similarly, for investments you make on 1 May 2020,
- You’ll be able to redeem them on the 2 May 2023.
The key takeaway here is that, after the lock-in period ends for your SIP instalment or lump sum investment, the ELSS is now a fully liquid, open ended equity-oriented investment scheme.
ELSS and taxes
ELSS is a tax-saving investment option with the potential for long-term growth and attractive tax benefits. The two main tax advantages are listed below.
- Section 80C: ELSS falls under Section 80C of the Income Tax Act, 1961. Investing in an ELSS gives you the opportunity to claim a deduction of up to ₹1.5 lakh from your taxable income in a financial year. So, the amount you invest in an ELSS is deductible from your total taxable income, therefore reducing your overall tax liability.
- Tax Advantage: Due to the mandatory 3-year lock-in, you do not have to pay short-term capital gains (STCG) tax on the investment. However, do keep in mind that if the gains from your ELSS investment exceed ₹1 lakh, then you would have to pay long-term capital gains tax at 10% plus any additional cess and surcharge on it.
The key takeaway here is that an ELSS helps you save taxes and offers the potential for wealth creation over the long term.
Here’s five important considerations to keep in mind about your ELSS fund
- Evaluate the investment performance: Assess how your ELSS investment has performed during the lock-in period. Review the returns and compare them with the benchmark index or other funds in the same category. It's important to have a clear understanding of your investment's performance.
- Reassess your financial goals: Think about your financial goals and if they’ve changed since you initially invested in the ELSS. Consider both short-term and long-term financial objectives, such as paying for an education or saving for retirement. Based on your personalised goals, you can better determine if the ELSS investment aligns with your financial requirements.
- Consider staying invested and benefit from compounding: If your ELSS investment has performed well and stays aligned with your financial goals, you may choose to stay invested. Equity investments tend to deliver higher returns over the long run. By staying invested, you also have the option to benefit from the power of compounding, which will boost your overall wealth, over time.
- Systematic Withdrawal Plan (SWP): If you need a regular income or have specific financial consideration, you may consider opting for a Systematic Withdrawal Plan (SWP) which gives you the opportunity to withdraw a fixed amount regularly from your ELSS investment. This option provides the benefit of flexibility, while still keeping your remaining investment intact to potentially appreciate from anticipated market upticks.
- Seek professional advice: If you're unsure about the next steps or need personalised guidance, it's a good decision to consult with a financial advisor. They'll help you analyse your finances and provide the suited recommendations based on your goals.
Completing the lock-in period for your ELSS investment opens up a range of opportunities for you to make the most of your funds. Whether you decide to stay invested or redeem your units, it's fundamental that you align your investment decisions to your financial goals. Remember to seek professional advice when needed. After considering your options and some planning, you’re already well on your way towards financially securing your future..
3 Steps To Follow After ELSS Lock Period Ends
ELSS or Equity Linked Savings Scheme refers to an equity mutual fund offering tax deduction benefits under section 80C of Income Tax Act, 1961. These funds offer the potential to generate market-linked returns. Like any other tax-saver investment, ELSS lock-in period is something to think about when it comes to making an investment choice.
This post walks you through the nitty-gritty of the ELSS lock-in period. Read on to find out everything involved!
ELSS Lock-in: An Overview
This open-ended equity-focused scheme usually comes with a lock-in period of three years. Thus, you can withdraw your funds after three years from the date of investment to claim tax-saving benefits. However, if you don’t want to withdraw, you can continue with your investment. The ELSS lock-in period rule applies to the units of the funds, not to the entire fund.
How Does the Lock-in for ELSS Funds Work?
Here is a break-up of how the lock-in duration for ELSS funds works
Lowest lock-in period: ELSS funds feature the shortest lock-in duration among all permissible investment options under section 80C. Therefore, you can liquidate your holding early while enjoying a ride on a tax-saving vehicle.
Liquidation restrictions: During the lock-in period, you cannot sell your investment. This lock-in duration also doesn’t permit pledges. Thus, you cannot expect to obtain loans against your investment during the lock-in period.
SIP lock-ins: The lock-in duration for SIP investments are calculated in a different manner. Each SIP installment is considered a new investment and has a lock-in period of 3 years. The lock-in period is calculated from the day units are allotted.
Automatic redemptions are not permitted: ELSS funds don’t come with any automatic redemption alternative. Unlike most 80C eligible investment instruments, ELSS funds provide the investors the liberty to keep on investing even after the lock-in period is over. Therefore, you can consider ELSS funds a trusted tool for creating wealth. However, if you want to redeem your funds early, you must submit a specific redemption request.
The lock-in term and tax benefits are not related: Typically, ELSS lock-in period has nothing to do with the tax benefits. Therefore, they may help you avoid the urge to sell your securities during market volatility.
What to Do When the Lock-in Duration Gets Over?
Whether you are buying funds in a lump sum or investing in SIP, the performance of your investment should determine your future action. For example, if your ELSS funds give you good returns and fantastic growth options, you can stay invested. On the other hand, if you want to redeem your earnings early and obtain tax benefits, you can withdraw the funds once the lock-in period is over.
How to Invest in ELSS?
There are two definitive ways to invest in ELSS funds. They are the following:
Lumpsum investment: Leveraging this method, you can buy some units of ELSS at a time. For example, you can choose to buy 500 units of an ELSS scheme for ₹50,000. Suppose you buy the units on March 24, 2023; the lock-in duration of the fund will be valid through March 24, 2026.
Bite-sized investment: If you are not ready to invest a lump sum amount in ELSS funds, you can consider this method. All you need to do is, invest in a SIP (Systematic Investment Plan). By leveraging SIPs, you can accumulate different units of different funds at different time frames. For example, you can buy 100 units of a fund on March 24, 2023. In this case, the lock-in period will expire on March 24, 2026. You can further buy another ELSS fund on June 1, 2023, which will feature a lock-in duration valid up to June 1, 2026.
Why Should You Invest in ELSS Funds?
Substantiated by the largest number of investor portfolios across different mutual fund categories, ELSS has always been one of the favourite investment instruments. ELSS funds offer a number of advantages, including the following:
According to the Income Tax Act, mutual funds' capital gains are sometimes taxed at the time of redemption. Given this, you may need to pay tax only when you bag some profit. As the ELSS funds are subject to a 3-year lock-in duration, their gains are classified as long-term capital gains.
Equity-focused LTCGs are always taxed at 10% and there’s no indexation benefit included. You are eligible to calculate the taxable gains from ELSS funds by deducting the redemption value from the cost of units you have redeemed. Moreover, you don’t need to pay any tax for the gain up to ₹1 lakh on LTCGs which makes this investment alternative a tax efficient one.
You can claim a tax deduction for your actual invested amount when you invest in ELSS through lumpsum mode or SIP. When you make investments using SIPs, you can spread them across the year. On the other hand, for lumpsum investments, you can avail immediate tax benefits.
While the majority of 80C eligible investment alternatives provide guaranteed and fixed returns, ELSS funds allow you to enjoy market-linked returns. These funds are generally mandated under SEBI guidelines. Thus, you can expect better returns when the market performs well.
You can invest in ELSS funds to amplify your investments and enjoy tax benefits simultaneously. However, like any other mutual funds, ELSS funds are also subject to market volatility. Therefore, carefully check the fund manager's performance history and payout records to enjoy the best returns. The lock-in period of ELSS mutual funds essentially is 3 years. Once it's over, you can either redeem your funds or continue with your investments, depending on your financial goals.
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.