3-year lock in period in ELSS: Can a nominee redeem the units early?

The Unit Linked Savings Schemes (ELSS) are equity-oriented Mutual Fund (MF) schemes that not only provide investors a superior return in the long term, but also provide tax benefits u/s 80C of the Income Tax Act, up to the current limit of Rs 1.5 lakh in a financial year.

Even the gains from ELSS investments up to Rs 1 lakh on redemptions made in a financial year are tax-free. Above the Rs 1 lakh limit, 10 per cent capital gain tax is applicable.

Due to tax benefits and the prospects of generating a higher long-term return, ELSS is one of the most popular tax-saving schemes among the investors.

However, a 3-year lock-in period is applicable on ELSS – as the schemes qualify for tax deductions u/s 80C, which is lowest among the tax-saving investments.

So, an investor may redeem the units on all business days subject to the completion of a lock-in period of three years from the date of allotment of units, as prescribed under the ELSS guidelines.

“Investment in ELSS is governed by the Equity Linked Saving Scheme, 2005 which sets out the provisions relating to the procedure and the conditions for investment in the scheme. Investing in ELSS helps an investor to take advantage of the high returns of the stock market at minimised risk. Also, investments in ELSS are allowed deduction from taxable income for the purpose of Income Tax u/s 80C of the Income Tax Act, 1961 up to Rs 1,50,000 subject to certain conditions. One such condition is that investments in ELSS are subject to a lock-in period of three years from the date of allotment of ELSS units. The ELSS units can be redeemed, transferred, assigned or pledged only on expiry of the lock in period of 3 years,” said Dr. Suresh Surana, Founder, RSM India.

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However, due to a spate of deaths due to the ongoing Covid-19 pandemic, investors have become apprehensive about their investments and start asking various questions about what would happen after their deaths.

One of such questions is – if the nominees have to wait for three years to redeem the ELSS units after the deaths of investors.

A nominee or legal heir, however, needn’t wait for three years and may redeem the units after one year from the date of allotment of units to the deceased unit holder on production of requisite documentary evidence to the satisfaction of the Asset Management Company (AMC).

“To provide relief to nominees in case of death of the original investor, the nominee or legal heir can redeem the investment before the expiry of lock in period of 3 years but only after the completion of 1 year from the date of allotment to the original investor in accordance with Rule 3 of the Equity Linked Savings Scheme, 2005,” said Dr. Surana.

Moreover, the Trustee of an AMC reserves the right to change the lock-in period prospectively from time to time, in the event of amendment(s) in the ELSS guidelines with respect to the lock-in period.