ELSS Withdrawal Rules in India: What to Know Before Redeeming ELSS Investment

If investors want to reap the growth potential of investing in mutual funds along with tax benefits under the old regime, then ELSS may be a suitable choice. ELSS tax-saver funds are ideal for most types of mutual fund investors. However, some investors are unaware that the withdrawal process is different for ELSS than other types of mutual funds. They simply go online and search “how to redeem mutual fund” and follow the steps given; only for their redemption request to be rejected. This leads to confusion and frustration on their part. This is why understanding the ELSS redemption process and associated considerations is essential for investors.

What is an Equity-Linked Savings Scheme (ELSS)?

ELSS is a mutual fund investment scheme where at least 80% of the pooled investment amount is invested into equity and equity-related instruments and the scheme has a mandatory lock-in period of 3 years. This is one of the tax-saving investment instruments where investors can get tax deductions for up to Rs. 1.5 lakh for contributions to ELSS under Section 80 of the Income Tax Act, if opted for the old regime.

5 Things to Consider Before Submitting an ELSS Redemption Request

Investors need to consider these factors to ensure a smooth ELSS mutual fund redemption:

• Lock-in Period: ELSS tax-saving mutual funds have a strict 3-year lock-in period from the date of investment. This means that under no circumstances can investors redeem units before the end of the lock-in period of 3 years. For SIP investments, each instalment is considered as a separate investment. So, if the instalment amount of your ongoing SIP is Rs. 5,000 then the ELSS units bought from this instalment on 1^st January 2025 cannot be redeemed until 31^st Dec 2027. Similarly, the units bought from SIP instalment on 1^st February 2025 cannot be redeemed until 31^st Jan 2028 and so on.

• Tax Implications: While ELSS has gained the nickname “ELSS tax saver fund” because investors can claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act under the old regime, the withdrawals from ELSS are not tax-free. Any gains over Rs. 1.25 lakh in a fiscal year from ELSS redemption are taxed under the Long-term Capital Gains (LTCG) Tax at 12.5%.

• KYC Compliance: Know Your Customer (KYC) compliance is mandatory for mutual fund transactions including ELSS redemptions. Therefore, investors must ensure that their KYC details are up-to-date and verified.

• Net Asset Value (NAV): The redemption is processed based on the NAV of the ELSS on the day of the submission of the request if it is submitted before the end of the trading day. Otherwise, it is processed based on the NAV of the next business day.

• Timing Consideration: Unless there is a pressing need and ELSS redemption is the only way to get access to money, investors must time their redemption request. This highlights the importance of building an emergency fund. A planned ELSS redemption based on the prevailing market conditions may likely maximise returns.

How to Redeem ELSS Mutual Funds?

There are two ways to redeem your ELSS mutual fund investment after the mandatory 3-year lock-in period. They are:

• Lump sum Redemption: Investors can consider redeeming all or a part of the units in their ELSS in a lump sum by initiating a redemption request with their fund house, app, or distributor.

• Systematic Withdrawal Plan (SWP): Investors can also choose to make periodic withdrawals at regular intervals from their ELSS mutual fund. They can set up an SWP to withdraw a specific amount or number of units at regular intervals.

Steps to Redeem Your ELSS Mutual Fund Investment

Here are 5 steps you need to follow to redeem your ELSS investment:

Step 1: Contact Your Fund House/Distributor/App.

Visit the website of your fund house, mutual fund distributor or app. Find the redemption form or contact their customer service for assistance. You can also visit the physical branch if you want to redeem your ELSS via offline means.

Step 2: Complete the ELSS Mutual Fund Redemption Form.

Fill in the redemption form with the required details such as the Folio number, the number of units you wish to redeem, bank details for crediting the redemption proceeds and so on.

Step 3: Submit the Required Documents.

You may have to submit documents in addition to the ELSS redemption form. This may include a cancelled cheque for bank account verification among other documents.

Step 4: Wait for Processing.

Redemption requests placed before 3 PM on a business day are usually processed the same day; otherwise, they are processed on the next working day. After processing it typically takes 2 business days for the funds to be credited to your bank account.

Step 5: Report Capital Gains.

Gains of more than Rs. 1.25 lakh from ELSS are taxed under the LTCG category. You must report these gains in your income tax return.

In conclusion, ELSS mutual fund redemption is a straightforward process in India. However, it does require awareness of the redemption process, lock-in period, taxation, and market conditions on the investor’s part. Proper planning and alignment with financial goals can ensure that investors make the most of their ELSS investments and make withdrawals, when needed, without any inconvenience or confusion.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.