Lots of people put their money in ELSS funds to save on taxes and make it grow over time. What happens if you need some cash right away? Can you use the money you invested in ELSS funds without taking it out?
This is where getting a loan against ELSS mutual funds comes in. Let us figure out how it works, when you can do it, and if it is a good idea.
Key Takeaways
- A loan against Equity Linked Savings Scheme for funds is usually not allowed during the three-year lock period.
- Equity Linked Savings Scheme funds are tax saving funds with a mandatory lock-in, which restricts redemption and pledging of Equity Linked Savings Scheme funds.
- After the lock-in period of Equity Linked Savings Scheme funds ends, investors may be able to pledge their Equity Linked Savings Scheme units to get a loan from banks or non-banking financial companies.
- The loan amount typically depends on the net asset value and the lender policies for equity-linked savings scheme funds.
- Taking a loan against funds, like an Equity Linked Savings Scheme, allows investors to retain their Equity Linked Savings Scheme investments while accessing liquidity from their Equity Linked Savings Scheme funds.
What is an ELSS Mutual Fund?
ELSS, which is also known as the Equity Linked Savings Scheme, is a type of fund that helps you save on taxes. You can get tax benefits under Section 80C of the Income Tax Act when you invest in it.
These funds mostly put your money in stocks and things related to stocks. So, they can be a bit risky because the market can go up and down. They can also give you more money back if you wait for a long time.
One thing you should know about ELSS funds is that you cannot take your money out for three years. This is called a mandatory 3-year lock-in period, and it is the shortest lock-in period compared to other ways to save taxes.
For example, let us say you put your money in an ELSS fund. You will not be able to get that money for three years from the day you invested it in the ELSS fund.
Features of ELSS Mutual Funds
ELSS funds are really popular. This is because they have a lot of useful features.
- ELSS funds have a lock-in period of three years.
- You can get a tax deduction of up to ₹1.5 lakh under Section 80C when you invest in them.
- These funds focus on investing in equities, which can be beneficial for investors looking for growth.
- Compared to other tax-saving options, they have the potential to give better returns over time.
- You can invest in ELSS funds in two ways, through a systematic investment plan or by investing in a lump sum.
All these features make them a good choice for people who want tax planning and long-term wealth creation.
Can You Take a Loan Against ELSS Mutual Funds?
Here is the direct answer:
You cannot take a loan during the 3-year lock-in period.
This is because equity-linked savings scheme units cannot be redeemed or transferred or pledged during this time. The situation is different once the lock-in period ends. Your equity-linked savings scheme units are like mutual fund units now. Some lenders may let you pledge your equity-linked savings scheme units as collateral.
For example, if your equity-linked savings scheme investment is worth ₹1 lakh after the lock-in period, a lender may give you a loan of around 50–70% of its value, depending on the lender’s policies.
How to Take a Loan Against ELSS Mutual Funds After the 3-Year Lock-in?
When your investment is done with the lock-in period, you can do these things:
1. See if you have had your ELSS units for 3 years.
2. Pick a bank or NBFC that gives loans using funds
3. Give them the details of the funds you own.
4. Promise your units using demat or a statement of your account.
5. Get the loan based on how the lender says your units are worth
The people lending you money will usually keep a hold on your ELSS units until you pay back the loan completely.
How Loan Against ELSS Works (After Lock-in)?
After the lock-in period, the process is really easy to understand.
When you use your mutual fund units to get a loan:
- The lender takes control of them for a while.
- You cannot cash them in while you are paying back the loan.
- But the good thing is that your investment is still working for you, supporting your tax planning and long-term wealth creation.
For example, if your ELSS investment does well while you are paying back your loan, you still get to keep the money it makes.
This means you can access funds without losing your investment growth potential when you need some money. Your mutual fund units are still there, allowing you to benefit from market gains while using the units as collateral.
Things to Know Before Applying for a Loan Against ELSS
Before applying, consider these important factors:
- Loan eligibility and lender policies
- Loan-to-value (LTV) ratio
- Interest rates compared to personal loans
- Risk of margin calls if market value falls
- Processing fees and repayment terms
Evaluating these points helps you avoid financial stress later.
Benefits of Loan Against ELSS Mutual Funds (Post Lock-in)
Once eligible, this option offers several advantages:
- Access to funds without redeeming investments
- Lower interest rates compared to unsecured loans
- Continued participation in market returns
- Quick processing in many cases
This makes it a useful option for managing short-term financial needs while staying invested.
Risks of Loan Against ELSS Mutual Funds
While beneficial, there are some risks:
- Market fluctuations can reduce investment value
- Lenders may ask for additional collateral (margin call)
- Failure to repay can lead to liquidation of your units
This is why borrowing against investments should always be done cautiously.
Tax Implications for Loan Against ELSS Mutual Funds
Taking a loan against ELSS does not impact your tax benefits under Section 80C.
Tax applies only when:
- You redeem the mutual fund units
- You earn capital gains
Types of taxation:
- Short-term capital gains
- Long-term capital gains (after lock-in period)
Understanding tax rules helps you make better financial decisions.
Research Insight
The Association of Mutual Funds in India, which is also known as AMFI, made a report that says equity mutual fund investments, including something called ELSS, are getting increasingly popular. This is happening because regular people are starting to invest in them. The Association of Mutual Funds in India says that equity mutual fund investments, like the ones that include ELSS, are really growing, and that is a thing.
This shows how investors are increasingly using mutual funds for both wealth creation and financial flexibility.
Conclusion
ELSS mutual funds are good because they help you save taxes and grow your money over time, supporting tax savings and long-term growth. The thing is, you cannot use your money during the time it is locked in, but after three years you can get your money when you need it.
Using the money you have invested as a guarantee for a loan can be an idea. But you have to be very careful. You should always think about what you want to achieve with your money, if you can pay back the loan, and what might happen in the market before you do something like this.If you do it the way this plan suggests, it can help you balance liquidity needs without compromising long-term wealth creation while having money available when required, all without hurting your chances of growing your ELSS mutual fund investments.
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