As the tax-savings season nears, we start running around to find the best tax-saving investment. Tax-saving mutual fund or Equity linked savings scheme (ELSS) is one of the popular tax-saving options. Almost all of us are aware that there is a lock-in of 3 years. However, there are a few aspects that many of us aren’t aware of (even I wasn’t aware of some of these points until I came across such aspects in a blog post).
Equity Linked Savings Scheme (ELSS), 2005 were notified by the Finance Ministry (and not SEBI). Hence, ELSS schemes are governed by these rules in addition to those put down by SEBI for mutual funds. To be honest, these rules will not change your opinion of ELSS but it is good to know these rules.
1. Investment shall be in multiples of Rs 500 with minimum investment being Rs 500.
2. ELSS units can be transferred, pledged or assigned only after 3 years.
3. The scheme shall be open for a minimum period of 3 months during a financial year. This aspect is not so important though. Majority of the ELSS schemes, in practice, are open ended schemes. Hence, you can invest in such schemes all year round.
4. If you invest in ELSS through SIP, every SIP installment is a fresh investment. This is where I have seen a few investors get confused. Such investors were under the impression that the lock-in of 3 years was from the date of first investment in ELSS. That is not the case. By the way, every investment (and not just through SIP) is a fresh investment.
For instance, if you purchase units through SIP installment on December 15, 2016, units purchased through this installment shall be locked in till December 15, 2019. Units purchased through SIP installment on January 15, 2017 shall be locked in till January 15, 2020.
This is an important aspect. Many proponents of ELSS (for tax-savings) argue that ELSS has the shortest lock-in period among all Section 80C investments. However, what is conveniently ignored is that every investment in ELSS is subject to a fresh lock-in of 3 years.
Under PPF, only your first investment is locked for 15 years. For a PPF account which is 12 years old, the lock-in is only for 3 years. For an account which has completed initial maturity of 15 years and has been extended, the maximum lock-in is 5 years. By the way, you can make partial withdrawals and take loans against your PPF balance.
I am not saying PPF is better than ELSS. However, you need to understand the fine print of the regulations before making a decision.
Read: ELSS vs PPF
5. The fund can be invested in equity, cumulative convertible preference shares and fully convertible debentures and bonds. There are a few more conditions (not as useful though). 80% of the funds should be invested in aforesaid securities. Remaining 20% of the assets can be parked in money market or liquid investments to handle redemptions. There are a few exceptions though.
6. As I understand, ELSS funds cannot invest in arbitrage.
7. The restriction on investments (Point. 6) need to be seen with another Income Tax rule where the fund needs to invest 65% into equities to maintain equity status (for taxation)
8. Each AMC can have just one ELSS scheme. Many have multiple schemes, by the way.
9. In the event of death of the investor, the nominee or the legal heir can withdraw the amount only 1 year after the date of allotment of units to the deceased. Hence, if the investor dies six months after purchasing the units, the nominee has to wait for at least six more months to be able to sell the units. Note nominee can get the units transferred to him/her much earlier but can’t sell those until 1 year is over. Essentially, the lock-in period goes down from 3 years to 1 year in the event of demise of the original investor.
To be honest, there is not much in these rules that will make or break your decision to invest in ELSS. But it is always good to know.