First MF Unitholder Dies: Transmission of ELSS Fund units is subject to one year lock-in..

When mutual fund (MF) units get transmitted (or / are transferred in case the existing first unitholder dies) to the second or /  third unitholders or /  the nominee (in case there are no joint holders), the heir could either choose to continue holding these inherited MF units or / sell them, if they are not interested in MF investments. However, if the nominee has inherited equity income tax-savings schemes, he/ she could hit a wall.

ELSS Fund comes with lock-in..

Equity-linked savings schemes (ELSS) come with a three (3) year lock-in. Under normal circumstances,  if you invest in an ELSS scheme, you can not redeem your units before three (3) years.  Investments made through systematic investment plans (SIP) are also subjected to a three (3)year lock-in, from the date of each of those instalments.

In the case of transmission, the lock-in gets reduced, though it does not get totally eliminated. As per the rules, if ELSS units get transmitted, then the lock-in gets reduced to just one year.

In other words, the nominee has to wait for one year (from the date on which the original unitholder had invested and not from the transmission date) to complete before he / she can sell the ELSS units.

In fact, even though the nominee submits the transmission documents before the completion of this one-year period, the actual process starts only after one year (after the purchase date) is over.

After the one-year lock-in period gets over, the ELSS units get transferred. The nominee can, of course, continue to hold the ELSS units thereafter or / sell them.

Contract for tax savings

The reason why the one-year lock-in is still present in transmission cases is that when the original unitholder invested in the ELSS scheme, he/ she is said to have entered into a contract with the government of India to invest money in exchange of income tax benefits. The investor, therefore, would have already availed the tax benefits in the year in which he/ she had invested.

Now, if the unitholder dies in the first year itself, the money too as per the contract needs to stay invested in the said ELSS scheme for a period of, at least, one year. But, since the first unitholder dies, the lock-in requirement is dropped to just one year, instead of the mandated three (3) years in normal cases.

Any chances of getting it quicker..?

Some fund houses claim that if the nominee (who has inherited the ELSS units through transmission) desperately needs the money before this one-year lock-in period is over, he / she may apply to the fund house on humanitarian grounds, says a large fund house that we spoke to.

The MF’s trustees review the application & decide whether or / not the case can be entertained. But, this is merely an exception & depends on fund house to fund house.

The one-year lock-in clause is applicable only to ELSS schemes. All other schemes that get transmitted can be sold as soon as the transmission process is complete.

Src: Mint 

Share: