How To Redeem ELSS Before 3 Years?

5paisa Research Team

Last Updated: 21 Jun, 2024 01:54 PM IST

How To Redeem ELSS Before 3 Years
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How To Redeem ELSS Before 3 Years? In India, an ELSS (Equity Linked Saving Scheme) is a tax-saving mutual fund with a three-year lock-in period. However, there may be times when investors must redeem their ELSS assets before the lock-in period expires. It is possible to redeem ELSS before three years, however, there are repercussions. Early redemption of ELSS investments incurs a penalty in the form of tax deductions and may even result in the loss of previously claimed tax benefits. Before considering the redemption of ELSS assets prior to the expiration of the obligatory lock-in period, investors should carefully analyse their financial circumstances and tax implications.

What is ELSS?

ELSS stands for Equity Linked Saving Scheme. In India, it is a form of mutual fund programme that provides tax benefits under Section 80C of the Income Tax Act. Because ELSS funds invest largely in stock and equity-related securities, they are an equity-oriented tax-saving investment choice.
ELSS funds have a three-year lock-in period, which means investors cannot redeem their investments before this time. Investors, however, have the option to redeem their ELSS units after the lock-in period.
One of the primary benefits of ELSS funds is the possibility of larger returns than other tax-saving products such as fixed deposits or regular insurance policies. Furthermore, investments in ELSS funds are tax deductible up to a certain limit, which can help individuals reduce their taxable income and save on taxes.
 

Benefits of ELSS Funds?

1.    Tax Advantages

Investments in ELSS funds qualify for tax deductions under Section 80C of the Income Tax Act, allowing people to reduce their taxable income by up to a certain maximum.

2.    Potential for Higher Returns

ELSS funds invest largely in equities, which have the potential to generate higher long-term returns than traditional tax-saving products such as fixed deposits or PPF (Public Provident Fund).

3.    Shorter Lock-in term

ELSS funds have a three-year lock-in term, which is shorter than other tax-saving choices such as PPF (15 years) or NSC (National Savings Certificate) (5 years).

4.    Diversification

ELSS funds invest in a diverse range of stocks, allowing investors to spread their risk across several industries and firms.

5.    Flexibility

Following the lock-in period, investors can redeem their ELSS units, providing liquidity when needed.
 

How to redeem ELSS before three years?

Redeeming ELSS investments before the three-year lock-in period is subject to certain restrictions and repercussions. To redeem ELSS before three years, follow these steps:

1.    Check the lock-in term

Ensure that the mandatory three-year lock-in time has elapsed from the date of investment.

2.    Contact the fund manager

Contact the fund house or asset management company where the ELSS investment is housed. They will advise you on the redemption process and the necessary papers.

3.    Fill out the redemption form

Complete the redemption form issued by the fund house. Details such as the investor's name, folio number, investment amount, and number of units to be redeemed will be required on the form.

4.    Submit the form and documents

Submit the redemption form and any other relevant documents, such as identity proof, residence proof, and bank account data, as indicated by the fund company.

5.    Awaiting processing

The redemption request will be processed by the fund house. The redemption period and form of payment (for example, direct credit to the registered bank account) may differ according to the fund house's policies.
 

What is the penalty for withdrawing from ELSS before 3 years?

There is no explicit penalty for withdrawing from an ELSS before the three-year lock-in period is completed. The tax benefits previously claimed on the investment amount, however, would be revoked. The amount withdrawn will be recognised as taxable income in the year of withdrawal, and investors will be required to pay taxes on the profits according to their applicable income tax slab. It is crucial to realise that the loss of tax benefits can have a major influence on overall investment returns.

Conclusion

Finally, redeeming ELSS investments before the three-year lock-in period has to be done with caution. While ELSS can be redeemed earlier than three years, there are repercussions to consider. Investors may lose previously claimed tax benefits, and the amount withdrawn will be classified as taxable income. To comprehend the implications and make an informed decision, it is critical to assess the financial necessity for redemption and consult with a financial counsellor or tax specialist. Redeeming ELSS before three years should be done with caution, taking into account the potential impact on overall returns and tax liabilities.

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