HOW DOES THE 3 YEAR LOCK IN OF ELSS FUNDS WORK?
Sure, tax saving mutual funds are remarkable; they are the greatest thing when it comes to saving tax! You’ve probably heard this enough, and you are probably either tired of hearing that or quite irritated. So, instead, we will talk about a small technicality that a lot of people want clarity on. But, before we get to that, let’s recall what these tax saver mutual funds are.
What is ELSS?
ELSS, also known as Equity-Linked Savings Schemes are tax-saving investments that invest in equity and equity-oriented investments. ELSS mutual fundsare also known as mutual fund tax saver as investments under ELSS funds are eligible for a tax deduction of up to Rs1.5 lakhs under Section 80C of the Income Tax Act, 1961. By investing in ELSS mutual funds, you can save up to Rs46,800 each financial year.
So now, let’s focus on the small technicality that requires our attention:
Lock-in period
One of the benefits of investing in ELSS mutual funds is the lock-in period it offers. Out of all the other tax-saving havens, ELSS funds offer the lowest lock-in period of 3 years. But when does you mutual fund investment actually become available for withdrawal?
Your investments are available for withdrawal when the units bought complete their three years, irrespective of their value at the time of redemption.
So, how does this work?
Let’s say you invested Rs40,000 in tax saving funds in 2014. There are 2 ways you could have invested in ELSS funds:
Way #1. Invest it all at one go.
Let’s say you you invested the entire amount of Rs40,000 in one-go in a tax saving mutual fund on 1st December 2014. Let’s say that the Rs40,000 investment got you 1000 units at a price of Rs. 40 per unit (that’s the NAV or the Net Asset Value).
Now, the 1000 units you accumulated are locked-in for 3 years. All of these mutual fund units will be “freed” on 1st December 2017 and you would be eligible to withdraw them on any date post that.
But what if you did not invest it all at one go?
Way #2. Invest in SIP investments
Being a smart investor, you decide to invest the same Rs40,000 in ELSS funds in 4 instalments of Rs10,000 each. When you invest in ELSS funds using a Systematic Investment Plan (SIP), your every instalment is treated as a new investment and thus, each instalment has to complete 3 years lock-in period on their own. In 3 years, i.e. on 1st December 2017, just your first instalment has cleared the lock-in period. The second instalment has just cleared 2 years, the third instalment is just 1 year down the line, and the last instalment has been recently invested. So your investments to be completely eligible for withdrawal, you’d have to wait 3 years from the last date of your instalment.
