ELSS Tax: What Happens After the 3-Year Lock-In Period?

ELSS Tax: Equity-linked savings schemes (ELSS) are popular among taxpayers who want to save on taxes while also earning a chance for capital growth. An ELSS is a type of mutual fund that must invest at least 80% of its assets in stocks. The remaining 20% can be invested in other assets like debt instruments.

What makes ELSS different from other mutual funds is its tax-saving benefits and the lock-in period of three years. But once this lock-in period ends, many people wonder if the investment becomes taxable.

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Tax Benefits and Lock-In Period

When you invest in an ELSS (Equity-Linked Savings Scheme), you can claim a tax deduction under Section 80C of the Income Tax Act, 1961. The maximum amount you can claim is Rs 1.5 lakh in a financial year, which helps lower your taxable income. However, there is one condition: the money you invest in an ELSS is locked for three years. During this period, you cannot withdraw or sell your investment.

After the three-year lock-in period ends, you can sell your ELSS units. The question is, will these units be taxable after the lock-in period?

Tax on Gains After the Lock-In Period

After the 3 years if you decide to sell your ELSS the gains you make will be taxed. The tax you will have to pay depends on how much profit you make. If your gains are above Rs 1 lakh in a financial year, you will be required to pay long-term capital gains (LTCG) tax at the rate of 10%. If your gains are less than Rs 1 lakh in a year, you don’t need to pay any tax on them.

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There is a change for ELSS investments made after July 23, 2024. For these investments, the LTCG tax rate is slightly higher. If you sell your units and make a profit above Rs 1.25 lakh, you will have to pay a 12.5% tax on the gains.

Tax on Dividends from ELSS

If you receive any dividends from your ELSS investments, these will be taxed according to your general income tax slab. This means that the tax rate on your dividend income will depend on your total income and which income tax slab you fall into. It’s important to note that while dividends from ELSS funds are taxable, these funds can still offer high potential returns compared to other tax-saving instruments under Section 80C.