Understanding ELSS Lock-ins: SIP vs Lumpsum

Equity Linked Savings Schemes (ELSS) are one of the most popular investment options, known for their dual benefits of tax savings and wealth creation. ELSS funds offer investors the opportunity to invest in the stock market while also providing tax benefits under Section 80C of the Income Tax Act. However, one crucial aspect of ELSS investments that investors should be aware of is the lock-in period. In this blog post, we will delve into how the lock-in period applies to SIP (Systematic Investment Plan) and lumpsum investments in ELSS schemes and when investors can redeem their units.

What is ELSS?

ELSS, as the name suggests, is primarily an equity-oriented mutual fund scheme. It invests a significant portion of its corpus in equities and related instruments. ELSS offers a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, making it an attractive option for taxpayers looking to save on taxes while aiming for potential capital appreciation.

Lock-in Period for ELSS Investments

The lock-in period is a unique feature of ELSS schemes that sets them apart from other mutual funds. ELSS funds come with a minimum lock-in period of three years. This means that once you invest your money in an ELSS scheme, you cannot redeem or withdraw your investment for a minimum of three years from the date of each installment in the case of SIP or from the date of your lumpsum investment.

Now, let’s understand how the lock-in period applies to SIP and lumpsum investments:

Lock-in Period for SIP in ELSS

If you choose to invest in ELSS through a SIP, here’s how the lock-in period applies:

Individual SIP Installments: Each SIP installment in an ELSS scheme is treated as a separate investment. The lock-in period for each SIP installment is calculated separately from its respective investment date. For example, if you start a SIP in an ELSS fund in October 2023, the units purchased through the October 2023 installment can be redeemed only after three years from that specific date.

Flexibility After 3 Years: After the completion of the three-year lock-in period for each SIP installment, you have the option to redeem those units without any restrictions. This allows investors to maintain liquidity while still enjoying the tax benefits of ELSS.

Lock-in Period for Lumpsum Investments in ELSS

For lumpsum investments in ELSS schemes, the lock-in period is straightforward:

Entire Investment: When you make a lumpsum investment in an ELSS fund, the entire investment amount is subject to the three-year lock-in period. You cannot redeem any units before the completion of the lock-in period, regardless of when you made the investment.

Flexibility After 3 Years: Similar to SIP investments, once the three-year lock-in period for your lumpsum investment is over, you can redeem your units without any restrictions.