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ELSS Mutual Funds: Early Withdrawal?

FundsIndia posted in it’s twitter account, that Value Research suggested no-lock-ins for ELSS fund savings if you didn’t try to save tax:

If you had not invested in the tax planning funds to save tax, the three-year lock-in does not apply which is mandatory for only those seeking tax deductions by investing in these funds. You can redeem your investments in these two funds whenever you wish.

This is not true. I tried to redeem certain tax-saving funds ahead of time but the application was rejected.

And then, how will the fund know that the applicant didn’t try to use it to reduce tax? Will they ask for a tax return? Many tax returns are so convoluted that it takes experts to decode them – so will funds hire a tax analyst?

I doubt this is the case. The tax department won’t be happy if ELSS funds (called “tax-saving” funds) are allowing early redemptions; the tax saving is contingent on their not being accessible for three years.

Of course ELSS is being scrapped from next year, so any further argument will be moot.

Update: Value Research has acknowledged the error, both on Twitter and in the comments section, and changed the original post.

In theory, if you make investments in ELSS funds and you later discover that you were not liable to pay tax, then you may redeem your investments within the lock-in period. This would involve getting a certificate to the effect from the tax authority and then approaching the fund for redemption. We are not sure how easy or difficult this may prove in practice and whether the tax authorities and the AMCs have the processes in place to actually do this.