Understand how ELSS’s three-year lock-in period works

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Tax planning is a crucial practice to lower your tax burden, which propels many to spend substantial time for choosing an appropriate tax-saving instrument. ELSS (equity-linked savings scheme) is one such popular tax saving instrument in the market. The scheme’s popularity is owing to its shortest lock-in of just 3 years and the potential to generate higher returns than traditional tax-saving options. Read on to understand ELSS and how its 3-year lock-in works. 

What is an ELSS fund?

ELSS is an open-ended equity-linked fund and the only tax-saving option in the mutual fund domain. As per Section 80 C, the fund offers tax deductions of up to Rs 1.50 lakh in a financial year. So, this is the only fund scheme that permits you to save your tax while earning high returns from equity fund investments. 

Additionally, ELSS has a lock-in of just 3 years than the minimum of 5 years lock-in available on other tax saving instruments. As mentioned above, this lock-in period is the lowest than other tax saving instruments like 5 years in a fixed deposit, 15 years in a public provident fund, 5 years in a national savings certificate, etc. Thus, ELSS has the potential to offer higher returns with the shortest lock-in tenure. 

How does the lock-in in ELSS work?

As a retail investor, you buy units of ELSS. As the lock-in of 3 years come to an end for those bought units, you get 2 options i.e., redeem or reinvest. Thus, the rule of lock-in applies to ELSS units that you buy from a specific ELSS scheme and not on the overall ELSS fund. You can invest in ELSS in 2 ways – lump sum and SIP mode. Discussed here is the difference between both the modes. 

Invest in ELSS fund through the lumpsum route

This is one of the important ways to go around ELSS investing. Investing in ELSS through the lumpsum route is where you purchase ELSS units in one shot. For instance, let’s suppose Mr. Rajat purchases 1,000 units of a preferred ELSS fund for Rs 1.70 lakh at once on 1st January 2022. So, in this case, Mr. Rajat will reach the lock-in on 1st January 2025, after which he can select to withdraw his ELSS investment or stay invested. Here’s a tabular representation to understand the lumpsum approach better –

Overall units 1,000
Net asset value (NAV)Rs 170
Overall investmentRs 1.70 lakh
Purchase date1st January 2022
Lock-in 3 years
End of lock-in1st January 2025

Invest in ELSS fund through the SIP mode

An SIP or systematic investment plan is another medium to invest in ELSS. Suppose Mr. Rajat wants to save tax through the ELSS option but cannot afford to purchase a huge number of units at once. So, he can go for the SIP mode and buy units at distinct time frames. Here’s how he can invest – 

Date Number of units boughtNet asset value (NAV)Amount (Rs)
3rd January 20214007028,000
1st February 20213008024,000
1st March 20215009045,000
1st April 202140011044,000
2nd May 202160012072,000
Total2,200 2,13,000

As shown in the table above, Mr. Rajat has invested Rs 2.13 lakh and acquired 2,200 units in ELSS through SIP mode. ELSS treats every instalment as a separate investment, and the lock-in rule applies for every instalment. Look at the table below to understand the lock-in for each ELSS instalment.

Date of purchaseNumber of unitsLock-in End of lock-in
3rd January 20214003 years3rd January 2024
1st February 20213003 years1st February 2024
1st March 20215003 years1st March 2024
1st April 20214003 years1st April 2024
2nd May 20216003 years2nd May 2024

Ending note

ELSS lock-in follows a simple approach. So, if you are investing through lumpsum mode, then the lock-in for the entire investible would be 3 years i.e., you can redeem your investment post 3 years completion. However, in case you are investing through SIP mode, then you must count every instalment in ELSS as an individual investment to compute the lock-in.

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