How to Take a Loan Against ELSS Mutual Funds?
ELSS (Equity Linked Savings Scheme) mutual funds are a type of tax-saving investment fund in India that primarily invests in equities (stocks). They are the only category of mutual fund that qualifies for this deduction. They come with a mandatory 3-year lock-in period, and their returns depend on market performance.
SEBI requires ELSS funds to invest at least 80% of their assets in equity and equity-related instruments. In this article, we will cover how to apply for a loan against ELSS mutual funds, factors to consider, eligibility, and more.
What is ELSS Mutual Fund?
The ELSS Mutual Fund is also known as the Equity Linked Savings Scheme. It is a type of mutual fund that offers tax benefits to investors under Section 80C of the Income-tax Act, 1961. ELSS funds can invest primarily in equity or equity-related instruments, and they have a lock-in period of three years. This means that investors might not be able to withdraw their investments from the fund for at least three years.
What is a Loan Against ELSS Mutual Funds?
A loan against ELSS mutual funds is a financial arrangement that allows borrowing against ELSS mutual fund units as collateral. With this ELSS mutual fund loan feature, you can access funds without having to sell your ELSS units. Thus, this enables you to meet short-term financial needs while keeping your long-term investment intact.
Let’s say you have invested in ELSS mutual funds for tax-saving purposes. However, now you suddenly need money for a short-term expense. Instead of selling your ELSS units, which could have potential long-term gains, you can opt for loans against ELSS units. The loan amount is determined based on the current value of your ELSS units, and you can use the funds for various purposes like paying off a medical bill, covering education expenses, or handling any unforeseen financial requirement.
Can You Take a Loan Against ELSS Mutual Funds?
You can avail of the loan against ELSS mutual funds only after the 3-year lock-in period is over. ELSS units under active lock-in cannot be redeemed, transferred, or pledged. This is a statutory restriction under the SEBI (Mutual Funds) Regulations, not a lender policy, so no bank or NBFC can accept ELSS units in lock-in as collateral.
After the 3-year lock-in period ends, the position changes. The units are no longer subject to the mandatory restriction, and lenders may accept post-lock-in ELSS units as collateral, subject to their internal approved list and policies. Whether a specific lender offers this facility depends on their product terms.
The Lock-in Rule
The 3-year lock-in period begins from the date of each investment. For lump sum investments, the lock-in starts on the date of purchase. For SIP investments, each monthly instalment has its own independent 3-year lock-in period.
This means that if you have been running a monthly SIP in an ELSS fund, the units from each instalment have a different lock-in expiry date. You cannot pledge any unit until that unit has been held for 3 years from its investment date.
How to Apply for Loan Against ELSS Mutual Funds on smallcase?
Here is how you can get a loan against ELSS funds using smallcase by following these steps:
- Log in to smallcase Credit: Visit smallcase Credit and select Against Mutual Funds to check your credit limit.
- Check eligible ELSS units: View ELSS units that have completed the 3-year lock-in and are eligible for pledging.
- Select funds to pledge: Choose eligible ELSS units as collateral and check the credit limit.
- Link your bank account: Add bank details for disbursement and set up an e-mandate.
- Pledge your mutual funds: Selected units are lien-marked while staying in your folio or demat account.
- Sign the loan agreement: Review, verify with OTP, and sign online.
- Receive the loan amount: The amount is usually credited within 2 working hours after signing.
What About SIP Investments in ELSS?
SIP investors in ELSS often assume that once the first instalment completes 3 years, the entire portfolio is eligible. That is not accurate. Consider the following example:
| SIP Instalment | Investment Date | Lock-in Expiry |
|---|---|---|
| Instalment 1 | 1 April 2022 | 1 April 2025 |
| Instalment 2 | 1 May 2022 | 1 May 2025 |
| Instalment 3 | 1 June 2022 | 1 June 2025 |
| Instalment 24 | 1 March 2024 | 1 March 2027 |
| Instalment 36 | 1 March 2025 | 1 March 2028 |
Each instalment row represents a separate block of units with its own lock-in expiry. Only units where the individual lock-in has expired are eligible to be assessed for pledging, subject to lender policy.
After the Lock-in: What Changes?
Once individual units complete their 3-year period, they are no longer subject to the mandatory restriction. At that point:
- The units can be redeemed, switched, or (subject to lender approval) pledged as collateral.
- The ELSS fund continues to function as an open-ended equity scheme. You do not need to redeem the units; they remain invested unless you choose otherwise.
- The Section 80C deduction you claimed at the time of investment is not reversed by pledging the units.
Things to Know Before Getting a Loan Against ELSS
The mechanics of a loan against post-lock-in ELSS units are the same as a standard Loan Against Mutual Funds (LAMF). The lender places a lien on the eligible pledged units, which restricts redemption until the loan is repaid.
Lien Marking Process
When you apply for a loan against post-lock-in ELSS units, the lender submits a lien request to the mutual fund registrar. The registrar marks a lien on the specified number of units in favour of the lender. This confirmation is sent to both the lender and the borrower. The units remain in your folio throughout the loan period; you retain ownership. However, you cannot redeem, sell, or switch them until the lien is removed. The lien is released once the loan is fully repaid and the lender notifies the registrar.
LTV Ratios and Loan Amount
The Loan-to-Value (LTV) ratio is the percentage of the fund’s current market value (NAV) that the lender is willing to lend. For post-lock-in ELSS units, which are equity-oriented funds, lenders typically apply equity fund LTV ratios.
| Fund Category | Typical LTV (Indicative) | Notes |
|---|---|---|
| Post-lock-in ELSS units | Up to 50% of NAV | Treated as equity mutual funds by most lenders; RBI guidelines generally cap LTV at 50% for equity-oriented funds |
| ELSS during lock-in | Not eligible | Cannot be pledged during the mandatory 3-year lock-in period |
Eligibility Criteria to Apply for a Loan Against ELSS Mutual Fund
The following criteria generally apply for a loan against post-lock-in ELSS units. Requirements vary across lenders.
| Criterion | General Requirement |
|---|---|
| Age | 18 years and above (upper limit varies by lender) |
| Residency | Resident Indian (NRI eligibility varies by lender) |
| Lock-in status | Units must have completed the 3-year mandatory lock-in period from the date of each investment |
| Fund eligibility | The specific ELSS scheme must be on the lender’s approved list of funds |
| KYC | Valid PAN card and Aadhaar; active bank account linked to the mutual fund folio |
| Account type | Individual holders are typically eligible; joint account and NRI terms vary by lender |
Interest Rates and Charges
Loans against mutual funds, including post-lock-in ELSS units, are secured loans and typically carry lower interest rates than unsecured personal loans or credit cards. Rates vary across lenders and depend on factors such as the lender’s benchmark rate, the fund type, and the borrower’s profile.
| Charge Type | Notes |
|---|---|
| Interest rate | Starts from 9.99% p.a. |
| Interest basis | Most lenders under an overdraft structure charge interest only on the amount drawn and for the period it is used |
| Processing fee | Varies by lender; may range from nil to a percentage of the loan amount |
| Foreclosure/prepayment | Many lenders offer nil foreclosure charges on overdraft-structured LAMF; confirm with your lender |
| Late payment | Varies by lender; confirm terms before signing the loan agreement |
What Continues While the Loan is Active?
Pledging post-lock-in ELSS units does not transfer ownership to the lender. The following continue normally during the loan period:
- Market returns: Pledged units remain invested in the equity market. Any NAV appreciation benefits you, as you retain ownership.
- Dividends: If you hold units under an IDCW (Income Distribution cum Capital Withdrawal) plan, dividend payouts continue to be credited to your registered bank account.
- Section 80C benefit: The tax deduction you claimed at the time of investing is not affected by pledging the units post-lock-in.
- SIP contributions: Any ongoing SIPs in the same fund continue to generate new units. Those new units, which may still be in their own lock-in period, are not part of the pledge.
The following restrictions apply to the specifically pledged units:
- You cannot redeem, sell, or switch the pledged units until the loan is fully repaid and the lien is removed.
- You cannot partially unpledge units; the lien applies to the full set of pledged units until loan closure (terms may vary by lender).
Risks to Understand Before Applying for a Loan Against ELSS Mutual Funds
NAV Fluctuation and LTV Breach
Post-lock-in ELSS units are equity-oriented, and their NAV moves with market conditions. If the NAV falls significantly, the value of your collateral decreases. If the outstanding loan exceeds the LTV ratio permitted by the lender, a shortfall occurs.
The lender may notify you to either pledge additional units or partially repay the loan to restore the LTV ratio within a specified timeframe. If the shortfall is not addressed, the lender may liquidate a portion of the pledged units.
Forced Liquidation on Default
If you default on repayment or fail to respond to a margin call, the lender has the legal right to sell the pledged ELSS units to recover the outstanding amount. This forced redemption triggers capital gains tax based on the holding period and gain amount, regardless of whether you intended to sell.
Lien Restriction on Portfolio Flexibility
Once pledged, you cannot redeem, switch, or transfer the specific units under lien. This reduces your ability to respond to market movements or rebalance your portfolio until the loan is fully repaid.
To Wrap It Up…
A loan against ELSS mutual funds adds a dynamic dimension to financial flexibility, allowing investors to meet short-term liquidity needs while maintaining a foothold in their long-term wealth-creation journey. However, it is important to understand the lock-in rules, LTV limits, interest costs, repayment terms, and liquidation risks before applying. You can check your credit limit for a loan against mutual funds and explore the options available.
Considering a Loan Against Mutual Funds (LAMF)? Explore LAMF on smallcase –
smallcase now offers loans against mutual funds! Although borrowers cannot take loans against funds with a lock-in period yet, they can take loans against any other funds that are not held in demat form or funds held through Zerodha demat accounts. Explore all about the eligibility criteria, documents required, features, and benefits of a loan against mutual funds on smallcase through the articles mentioned below:
Frequtnly Asked Questions About Loan Against ELSS Mutual Funds
You can take a loan against an ELSS mutual fund, but not while the lock-in period is active. ELSS units cannot be redeemed, transferred, or pledged during the mandatory 3-year lock-in period. Once individual units complete their 3-year period, they may be eligible for pledging, subject to the lender’s approved list and internal policies.
Each SIP instalment has its own independent 3-year lock-in period counted from the date of that specific investment. Units from a May 2022 SIP instalment complete their lock-in in May 2025; units from a May 2023 instalment complete theirs in May 2026, and so on.
No, pledging is not treated as a sale or redemption under Indian tax law. No capital gains tax is triggered at the time of pledging. Capital gains tax applies only when the units are actually sold or redeemed, either voluntarily by you or forcibly by the lender in the event of a default.
Interest rates vary across lenders. Loans against equity mutual funds, including post-lock-in ELSS units, generally start from 9.99% p.a. Under an overdraft structure, interest is charged only on the amount drawn and for the period it is used.
Yes, ongoing SIP contributions to the same fund continue normally. The new units generated by those SIPs are not part of the original pledge and are not subject to the lien, though they will have their own independent 3-year lock-in periods.
Post-lock-in ELSS units may be treated as equity mutual funds if they are on the approved schemes list for LAMF. Equity mutual funds get a credit limit of 45% of market value. So, ₹1 lakh of eligible ELSS units may give a credit limit of around ₹45,000
A fall in NAV can lead to an LTV breach if the outstanding loan exceeds the allowed limit. The borrower gets 7 days to repay the excess amount. If unpaid, Bajaj Finance may liquidate pledged units to recover the amount.
No, only post-lock-in units can be pledged. Units still within their 3-year lock-in period remain under the statutory restriction and cannot be included in any pledge, regardless of the loan application.
