ELSS Lock-in Period: How It Works & What Should Be Withdrawn After 3 Years

Investing in tax-saving options is an important part of financial planning. One such investment tool is the Equity Linked Savings Scheme (ELSS), a popular mutual fund scheme that helps investors save tax under Section 80C of the Income Tax Act. ELSS not only provides tax benefits but also offers potential for wealth creation through market-linked returns. However, it comes with a mandatory lock-in period, which investors must understand before making any financial decisions. Let’s explore what ELSS is, how the lock-in period works, and whether withdrawing your investment after 3 years is the right choice.

What is ELSS & Why is the Lock-in Period Important?

ELSS (Equity Linked Savings Scheme) is a type of mutual fund that primarily invests in equity and equity-related instruments. The key attraction of ELSS is its tax-saving feature, as investors can claim a deduction of up to ₹1.5 lakh under Section 80C.

A unique feature of ELSS is its lock-in period. A lock-in period refers to the duration during which an investor cannot redeem or sell their investment. ELSS has the shortest lock-in period among all tax-saving investment options under Section 80C.

Lock-in Period for Various Tax-Saving Investments:

• ELSS – 3 years
• Fixed Deposit (FD) – 5 years
• Public Provident Fund (PPF) – 15 years
• National Pension Scheme (NPS) – Till retirement (60 years)
• National Savings Certificate (NSC) – 5 years

Since ELSS has the shortest lock-in period, it becomes an attractive investment choice for those looking for both tax savings and relatively quicker liquidity.

How Does the ELSS Lock-in Period Work?

When you invest in ELSS, the lock-in period applies individually to each unit purchased, not the overall investment. This means if you invest in ELSS through a Systematic Investment Plan (SIP), each SIP installment will have a separate 3-year lock-in period.

For example:

• If you invest a lump sum amount on 1st April 2022, you can withdraw it after 1st April 2025.
• If you invest through SIP, say ₹5,000 each month starting 1st April 2022, then only the first installment will be available for withdrawal on 1st April 2025, the second on 1st May 2025, and so on.

This staggered approach should be kept in mind while planning your withdrawals.

What Happens After the 3-Year Lock-in Period?

Once the lock-in period of 3 years is completed, investors have multiple options:

1. Continue Holding the Investment

Many investors prefer to stay invested in ELSS beyond the lock-in period as it remains an open-ended mutual fund after 3 years. If the fund is performing well, staying invested can provide long-term capital appreciation.

2. Partial Withdrawal

If you need funds, you can choose to withdraw only a part of your investment instead of the entire amount. This option provides liquidity while allowing the remaining units to continue growing in value.

3. Redeem Entire Investment

If you have met your financial goals or need liquidity, you can redeem the entire investment. However, before doing so, check the fund’s performance and tax implications.

Should You Withdraw Money from ELSS After 3 Years?

Reasons to Withdraw ELSS Investment After 3 Years

1. Underperformance of the Fund – If the fund has consistently given poor returns compared to other mutual funds in the same category, withdrawing and reinvesting in a better-performing ELSS may be a wise move.
2. Financial Emergencies – If you have an urgent financial need, withdrawing from ELSS can provide liquidity without any exit load.
3. Portfolio Rebalancing – If your investment portfolio is heavily inclined towards equities and you want to diversify into debt instruments, withdrawing and reallocating funds can be an option.

Reasons to Stay Invested in ELSS Beyond 3 Years

1. Compounding Benefits – Equity investments tend to deliver better returns over the long term due to the power of compounding. Staying invested can help in wealth creation.
2. No Additional Lock-in Period – Unlike new tax-saving investments that will have fresh lock-in periods, continuing ELSS allows you to stay invested without any restrictions.
3. Avoiding Tax on Capital Gains – If you sell ELSS units after 3 years and earn a profit exceeding ₹1 lakh in a financial year, long-term capital gains tax (LTCG) of 10% will apply. Holding for a longer period can reduce taxable gains.
4. Market Timing Risks – If the market is down when your lock-in period ends, withdrawing may not be ideal. Waiting for better market conditions could fetch higher returns.

Tax Implications of ELSS Withdrawal

While ELSS helps in tax saving at the time of investment, the gains from ELSS withdrawal are taxable.

• Gains up to ₹1 lakh per financial year – Exempt from tax.
• Gains above ₹1 lakh per financial year – Taxed at 10% as LTCG (Long-Term Capital Gains Tax).

For example, if your total ELSS profit is ₹1.5 lakh, you will be taxed 10% on ₹50,000 (₹1.5 lakh – ₹1 lakh exemption).

Best Practices for ELSS Investment & Withdrawal

1. Monitor Fund Performance – Regularly check the returns, expense ratio, and consistency of your ELSS fund.
2. Reinvest Wisely – If withdrawing, reinvest in a diversified portfolio rather than spending the amount.
3. Use Systematic Withdrawal Plan (SWP) – If you need periodic funds, SWP allows you to withdraw a fixed sum monthly instead of a lump sum.
4. Consult a Financial Advisor – Before making any decision, seek expert advice to optimize tax savings and wealth growth.

ELSS remains one of the best investment choices due to its dual benefits of tax saving and high returns. Understanding how the lock-in period works and making an informed withdrawal decision can maximize your financial gains.