Equity-linked saving schemes or ELSS funds are a great option to save tax. These come with a mandatory 3-year lock-in term.
As a result, the investor will not be able to withdraw cash before the end of 3 years.
To understand this better – let us explain how the best tax saving ELSS funds lock-in period works and when it is available for your investment return.
When you invest in a mutual fund, you get the fund units against your invested amount and the lock-in period extends to those units. After the completion of three years, you can reclaim those units.
For example: – Suppose you paid Rs. 10,000 in tax-saving ELSS funds in 2018.
Case 1: If investing the entire amount in one go (lump sum investment of Rs 10,000)
Suppose on January 1, 2018. You invested a full 10,000 in a tax-saving fund. If the NAV (unit price) of a mutual fund scheme is Rs. 100 at the time of your investment, then you will get 10,000 / 100 = 100 units. Currently, these 100 units will have a lock-in period of three years. So all these units will be available for redemption on 1 January 2021.
However, if you invest through SIP, things will work differently.
Case 2: If you invest in a tax-saving fund or ELSS fund through SIP
Instead of investing outright in a mutual fund scheme, suppose you have decided to invest in monthly installments or SIPs for five months.
Suppose in January 2018, and you invest Rs. 2000 SIP per month; then, you will get 20 units at a NAV of Rs. 100 in January.
You invested in Rs. Two thousand in the second month, i.e., February 2018, and got 25 units at an NAV of Rs. 80.
You have again invested Rs. 2000, third month, and got 21.05 units at a NAV of Rs. 95.
You have reinvested the same amount in the fourth and fifth months, i.e., Rs. Two thousand in monthly SIP for tax saving fund and that got you 19.04 and 18.18 units at a NAV of Rs. 105 and Rs. 110 respectively.
Total number of units you purchased = 103.27 units
Total amount (money) invested = Rs. 10,000
Now, you should note that for each of the units you purchased separately, a lock-in period applies. In the second case, the 20 units you purchased in January 2018 will be available for redemption after January 2021, as three years have passed.
It should note that these 20 units are eligible for redemption, while the remaining units are not yet eligible for redemption as they have not completed three years.
Similarly, 25 units you have purchased in February 2018, as they will be available to redeem after February 2021. For the third, fourth, and 5th months of SIP, it will follow the same pattern.
We hope this detailed answer will help you understand how the lock-in period works in tax savings ELSS funds.