Millions of Indian taxpayers put money into Equity Linked Savings Schemes (ELSS) every year, drawn by the tax break and the shot at equity-style returns.

The catch has always been the lock-in. Three years during which that money simply cannot be touched, emergency or not.

A growing number of banks, non-banking financial companies (NBFCs), and fintech lending platforms are now offering investors a way to use that money anyway, not by shortening the lock-in, but by letting them borrow against ELSS units once the period lapses, without redeeming a single one.

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The rules brook no shortcuts

ELSS funds invest primarily in equities and qualify for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, which is why they remain one of the most widely held tax-saving instruments.

Units within the three-year lock-in cannot be redeemed, transferred, or pledged under any circumstance, a restriction rooted in SEBI’s mutual fund regulations rather than individual lender policy.

Investors who built their ELSS holdings through a systematic investment plan face an added wrinkle. Each monthly installment carries its own three-year clock from its date of purchase, so a single folio can hold a mix of units that are loan-eligible and units still locked.

How the loan process works

Once units do cross that threshold, they can be pledged. A process lenders call “lien-marking,” in favor of a lender through registrars such as CAMS or KFintech, is typically confirmed digitally via an OTP while remaining in the investor’s own folio or demat account throughout.

The lender then sets a credit limit as a percentage of the pledged units’ market value, known as the loan-to-value ratio, which for equity-oriented funds such as ELSS tends to fall somewhere between 50 and 75 percent depending on the lender.

Borrowing power and costs

An investor holding ₹5 lakh in post-lock-in ELSS units, for instance, could unlock a credit line of roughly ₹2.5 lakh to ₹3.75 lakh, drawing on it as needed and paying interest only on the amount withdrawn rather than the full sanctioned limit.

Loan sizes on these facilities can range from a few tens of thousands of rupees for smaller portfolios to several crore for larger ones, and funds are typically credited within a few hours to a couple of business days of the lien being confirmed.

Advertised interest rates on these loans currently hover around 10 to 11 per cent a year across lenders, well below what unsecured personal loans or credit cards usually charge.

The investment stays, the cash arrives

The appeal lies in leaving the investment itself undisturbed.

Pledging is not treated as a sale, so it does not trigger the 12.5 per cent long-term capital gains tax that applies once annual profits from equity investments cross ₹1.25 lakh, nor does it claw back the Section 80C deduction already claimed at the time of investment.

Investors keep receiving any dividends and market gains on the pledged units for as long as the loan runs. Some lenders pitch the facility as a way to keep an annual tax-saving routine going without finding fresh money each year, pledging older, already-unlocked ELSS units to fund a new year’s Section 80C investment, rather than redeeming existing holdings.

Markets can be unforgiving companions

The arrangement carries real risk, however.

Because ELSS units are equity-linked, a falling market can pull their value below what the lender is comfortable with, triggering a margin call that requires the borrower to repay part of the loan or pledge additional units.

Persistent default can push the lender to sell the pledged units outright to recover its dues, a step that would also crystallize capital gains tax based on how long the units were held, at potentially unfavorable prices.

Pledged units cannot be redeemed, switched, or used to rebalance a portfolio until the loan is cleared in full.

Choosing the right lender

Eligibility and terms also vary meaningfully across the market. Smallcase, for one, currently excludes ELSS units from its mutual-fund loan facility altogether, even after the lock-in lapses, while other lenders accept them once the three-year period is over and the scheme features on their approved list.

For investors weighing a genuine need for cash against a tax-saving portfolio they would rather not break. The facility offers a middle path, provided they compare loan-to-value ratios, interest rates, and eligibility criteria across lenders before pledging anything.

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FAQs

Q1: Can I get a loan against ELSS before the three-year lock-in ends?

Ans: No, ELSS units cannot be pledged as collateral until their mandatory three-year lock-in period has expired.

Q2: How much loan can I get against ELSS mutual funds?

Ans: The loan amount depends on the lender’s loan-to-value policy and the current market value (NAV) of the eligible post-lock-in ELSS units.