ELSS Lock-in Period: Meaning, Duration & Rules

ELSS Stands for “Equity Linked Savings Scheme” which is a diversified equity-oriented scheme which predominantly invests majority of funds in the equities having mandatory lock-in period of 3 years from the date of purchase offering growth as well as tax deductions up to 1,50,000 under section 80C, while most of the investors prefer ELSS for the tax saving purposes.

What is lock-in period in ELSS

The lock-in period in ELSS means the investor who purchased the ELSS funds cannot redeem their units until completing predetermined period of 3 years from the date of purchase. The redemption is based on the units invested. Mutual funds are of two types, namely, open-ended and close-ended. Close-ended mutual funds are always with a lock-in period, like ELSS these are the only open-ended mutual funds with 3 years of minimum lock-in period. The lock-in period is applicable for both lump sum investment and SIP plans.  

Why lock-in period in ELSS is important

The lock-in period is essential for both the investors as well as the mutual fund houses to maintain the benefits of investing in ELSS. This investment scheme is to provide the returns in capital appreciation over the long term to the investors and avail tax benefits as well. This lock-in period is very important to ensure stability over the funds and to prevent liquidity issues by limiting withdrawals of excessive selling which leads to increase potential stability to mitigate the short-term market fluctuations within the funds to create conducive environment for sustainable growth in the long run.

How to calculate the lock-in period

The lock-in period of lump-sum investment ends after the end of three years from the initial investment date.

Example to Explain

Let’s assume you have invested in ELSS through SIP on the following dates and amounts

SIP 1: ₹5,000 on January 1, 2025

SIP 2: ₹5,000 on February 1, 2025

SIP 3: ₹5,000 on March 1, 2025

Each SIP will have a separate 3-year lock-in period.

Lock-in is applied to each SIP instalment separately, If one invested ₹5,000 each month, each monthly instalment will have its own 3-year lock-in period from the date of investment. Once the 3-year lock-in period expires for any instalment, you can redeem the units from that instalment. You cannot redeem part of a specific SIP instalment before the lock-in period ends you’ll need to wait until the full 3 years for each instalment.

Let’s say you make a lump-sum investment of ₹20,000 in ELSS on April 1, 2025. In this case, the lock-in period for the entire amount would be April 1, 2028.

What to do after the lock-in period ends

As soon as the lock-in period ends, it is not mandatory to exit the investment and redeem the funds. One can continue with the same funds by reviewing the fund’s performance and analysing their investment style and the market impact on its mutual. One may compare other ELSS mutual funds schemes’ performance and transfer the units to other funds to save tax. Hence the ELSS is open-ended fund you can anytime redeem or transfer the units. If there is no emergency fund needed stay invested for 5-10 years would generate consistent returns.