Equity Linked Savings Scheme (ELSS) mutual funds are a popular investment option in India, known for their dual benefits of tax savings and wealth creation. They have become the go-to choice for individuals looking to avail of tax deductions under Section 80C of the Income Tax Act. However, a question that often arises among investors is whether money can be withdrawn from an ELSS mutual fund.
This article aims to provide a comprehensive understanding of the withdrawal process, the restrictions involved, and important factors to consider before withdrawing from an ELSS fund.
What is an ELSS Mutual Fund?
ELSS is a type of equity mutual fund that invests primarily in equity and equity-related instruments. It offers investors the benefit of tax deductions up to ₹1.5 lakh under Section 80C. Additionally, ELSS funds have the potential to deliver higher returns compared to traditional tax-saving instruments such as Fixed Deposits or Public Provident Fund (PPF), albeit with a higher risk profile.
The unique feature of ELSS funds is their mandatory lock-in period, which differentiates them from other types of mutual funds.
Lock-In Period in ELSS Funds
ELSS mutual funds come with a lock-in period of three years, the shortest among all Section 80C investment options. During this time, investors cannot redeem their units, making it a relatively illiquid investment. The lock-in period ensures that investors remain invested for the long term, allowing their investments to grow and potentially reap the benefits of compounding.
The three-year lock-in applies to each installment made under a systematic investment plan (SIP), which adds complexity to withdrawal planning.
Can You Withdraw Money From an ELSS Fund?
The simple answer is yes, but only after the lock-in period ends. Once the mandatory three-year lock-in period is over, you are free to withdraw your investment or continue holding it, depending on your financial goals and the fund’s performance.
1. Partial and Full Withdrawals
After the lock-in period, investors have the flexibility to either partially or fully redeem their units. This flexibility can be beneficial if you need funds for a specific purpose or want to continue reaping the benefits of the remaining units.
Partial Withdrawal
If you have invested a lump sum amount in an ELSS fund, you can redeem only the units that have completed the three-year lock-in period. Units that are still within the lock-in period cannot be withdrawn.
For SIP investors, each SIP installment is treated as a separate investment with its own three-year lock-in period. For example, if you started a SIP in January 2020, the units purchased in January 2020 can be redeemed in January 2023, while those purchased in February 2020 will be available for redemption in February 2023, and so on.
Full Withdrawal
Full withdrawal is possible only if all the units in the fund have completed their respective lock-in periods. If you invested a lump sum three years ago, the entire investment can be withdrawn. However, for SIP investors, full withdrawal will require waiting until the last SIP installment completes its lock-in period.
2. Withdrawal Before Lock-In Period Ends
Premature withdrawal from an ELSS mutual fund is not allowed under any circumstances. This restriction ensures that ELSS funds remain a long-term investment tool. Unlike Fixed Deposits, where premature withdrawal may attract penalties, ELSS funds simply do not permit early redemption.
If you find yourself in urgent need of funds, you will need to explore alternative options, as ELSS investments are non-accessible during the lock-in period.
Steps to Withdraw Money From an ELSS Fund
Once the lock-in period is over, withdrawing money from an ELSS mutual fund is a straightforward process. Here’s how you can go about it:
1. Online Redemption
If you invested in the ELSS fund through an online platform, you can log in to your account, navigate to the redemption section, and select the fund you wish to withdraw from. Enter the number of units or the amount you want to redeem, and confirm the transaction.
2. Redemption Through AMC
If you invested directly with the Asset Management Company (AMC), you can visit their website or branch office to initiate the redemption process. You may need to provide details such as your folio number and registered email address.
3. Through a Financial Advisor
If you invested through a financial advisor or distributor, you can approach them for assistance with the redemption process. They can guide you through the required steps and ensure the transaction is completed smoothly.
Tax Implications on Withdrawal
Withdrawals from ELSS funds are subject to tax as they fall under the category of equity mutual funds. Here’s how taxation works:
1. Long-Term Capital Gains (LTCG)
Since ELSS funds have a lock-in period of three years, any gains from redeemed units are classified as long-term capital gains (LTCG).
2. Tax-Free Limit
LTCG of up to ₹1 lakh in a financial year is tax-free. If your total gains exceed ₹1 lakh, the excess amount will be taxed at a rate of 10%, without the benefit of indexation.
For example, if you earned LTCG of ₹1.5 lakh after redeeming your ELSS fund, ₹1 lakh would be tax-free, and you would pay 10% tax on the remaining ₹50,000.
Should You Withdraw Money From an ELSS Fund?
While you can withdraw money from an ELSS fund after the lock-in period, it may not always be the best decision. Consider the following factors before redeeming your investment:
1. Performance of the Fund
Assess the fund’s performance over time. If it has consistently delivered good returns and aligns with your financial goals, you might want to stay invested for a longer period to maximize your gains.
2. Financial Needs
If you have pressing financial needs or wish to invest in a better-performing fund, withdrawing from your ELSS fund might make sense. However, ensure that the timing and decision align with your broader financial strategy.
3. Goal-Based Investing
If your ELSS investment was made with a specific financial goal in mind, such as saving for retirement or a child’s education, ensure that the goal has been achieved before withdrawing.
Alternatives to ELSS Withdrawal
If you find yourself in need of funds during the lock-in period, consider these alternatives:
1. Personal Loans
Taking a personal loan or using an existing line of credit can be a temporary solution. This avoids disturbing your ELSS investment and allows it to continue growing.
2. Emergency Fund
Having an emergency fund in place can help you handle unforeseen expenses without the need to withdraw from your ELSS investment prematurely.
Conclusion
Yes, you can withdraw money from an ELSS mutual fund, but only after the mandatory three-year lock-in period. While withdrawals are flexible post-lock-in, the decision to redeem your investment should be based on careful consideration of your financial goals, the fund’s performance, and potential tax implications. ELSS funds are designed to be long-term investment tools, and staying invested for a longer duration can help you reap maximum benefits.
Whether you choose to redeem your investment or let it grow further, make sure your decision aligns with your broader financial strategy and goals. Thoughtful planning can ensure that your ELSS investment continues to work in your favor.
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