However, in a case when the primary unit holder of the ELSS fund dies and the units are transferred to the nominee (in case the account is not maintained jointly) or the second or third unit holders, and if he/she decides to continue to hold the investment, the lock-in period for the ELSS gets reduced.
In accordance with the rules prescribed for ELSS, in case the units held in an ELSS account by an individual gets transmitted, the lock-in period is reduced from the usual 3-year period to one year and is not eliminated totally. And, the period of one year lock-in is accounted not from the date the units get transferred into the account of the nominee but from the date when the original unitholder invested in the ELSS fund. This means the nominee can sell the units only after completion of 1 year from this date.
It is to be noted that even when the nominee or the second or third unit holder to whom the ELSS units are to be transferred submits transfer related documents before the end of this one-year term, the actual process of transmission of ELSS units gets effected after this one-year lock-in term. And upon the transfer, it as at his discretion whether he wishes to remain invested in the scheme or wants to sell the units thereafter.
The rationale behind the lock-in period of 1 year in ELSS scheme even in the case of transmission is that money in the scheme is invested as part of the contract with the government of India whereby the individual gets tax benefits under section 80C. And, now, if the investor dies in the first year of investment, the funds are required to remain invested in the scheme for a minimum of 1 year. So, the otherwise lock-in period of 3 years in case of ELSS scheme gets lowered to just 1 year.