Locked-in investments after death: what every family must know
Following V. Panda's death, his parents inherited his assets, but two tax-saving mutual fund investments totaling ₹675,000 are inaccessible due to a lock-in period. This highlights the importance of understanding lock-in rules for financial planning.
Cancer consumed the life of 40-year-old V. Panda in January 2024. Nearly two years later, all assets belonging to the deceased marketing professional have been transferred to his parents and liquidated, barring two investments in mutual funds.
These funds totalling ₹345,000 are blocked. That’s because the investments were made in mutual fund schemes that have a mandatory lock-in period. So, Panda’s parents will have to wait until the end of the lock-in and subsequently start the redemption paperwork to liquidate the investment if they wish.
Panda’s case wasn’t about documents not being in order, but about a product that comes with a lock-in. And, this is why it’s important to understand the rules around lock-ins to ensure peace of mind, and the use of funds when the need arises.
Take the case of a non-resident Indian (NRI), residing in the US, whose septuagenarian father passed away six months ago. His father had a bulky investment in Reserve Bank of India’s Floating Rate Savings Bonds, which will mature at the end of 2026.
While he has been able to redeem investments in stocks and mutual funds, and has received funds from life insurance companies, the bonds will mature only a year later and, hence, he will have to wait to close the linked bank account. He didn’t want to disclose the name.
Lock-in applicable to which products?
But products have a varying lock-in period. A 5-year lock-in is applicable to tax-saving fixed deposits, Post Office Small Savings Schemes as well as Retirement Funds and Children’s Funds under mutual funds, while Equity-Linked Savings Schemes (ELSS) have 3-year lock-in. We take a look at the transfer clause applicable under these upon the death of the holder.
Mutual funds
Upon the death of an investor, the investments go through two processes. First, the investment is transferred to the nominee or the legal heir, and the second is the redemption of the funds.
“On the demise of the sole asset owner, the nomination gets triggered and by following the process of transmission, the nominee becomes the asset owner as part of the contractual terms," says Rajat Dutta, founding director of Inheritance Needs Services, which assists individuals claim inheritance assets.
While the assets can be transferred upon submission of relevant documents, the time taken to liquidate the investments subsequently would vary across the types of schemes chosen. This is because in MFs there are two types of schemes that have a lock-in - ELSS and closed end funds like Retirement or Children Fund, hybrid funds and even some debt schemes.
Even though the assets are transferred to the nominee or the heir, the type of scheme dictates how soon they can liquidate the funds.
Hemant Rustagi, founder and director at financial planning advisory Wiseinvest, says that if an ELSS investor dies during the 3-year lock-in, the nominee or legal heir can redeem the units after one year from the original date of allotment, even though the lock-in period hasn't ended.
For example, if a person invested money in ELSS in January 2025 and died in June 2025, the units of ELSS mutual fund can be transferred to the nominee in June 2025. But the nominee cannot sell the units before January 2026, even though the lock-in on ELSS ends only in January 2028.
There is a confusion in the industry regarding the one-year period, too. But upon examining multiple scheme documents, we found that the one-year period is counted only from the date of the original investment. “In the event of death, the nominee or legal heir shall be able to redeem the investment only after the completion of one year, from the date of allotment of the units to the deceased unit holder,' states the Mirae Asset ELSS scheme information document.
However, in case of another type of closed-ended funds, the transfer to the nominee or heir would be commissioned, but whether the lock-in period would have to be served for the balance period would depend on the fund house’s internal policy.
“For ELSS, it's a consistent practice of only one year lock-in (for redemption) in case of death of primary holder, as per the Income Tax rules. but closed-ended products don't have a lock-in in the tax sense," said the chief executive officer of a private mutual fund house, requesting anonymity.
Since there is no circular or standard procedure with respect to other closed-ended products, every fund house follows a different rule and specifies the same in the scheme documents. So, checking the documents helps.
The lock-in applies to even Retirement and Children Plans listed under mutual funds, which have a longer 5-year lock-in. “Under Retirement funds and Children funds, there are no regulatory provisions and all depends on the fund house," the operations head of a leading fund house clarified on the condition of anonymity.
There is a need for a standard procedure now, as many closed-ended schemes have emerged since the last Association of Mutual Funds Circular was issued in 2015. “The clarity was issued earlier when the only closed-ended schemes were ELSS," as per Rustagi.
RBI bonds
Mutual funds aren’t the only instruments where one needs to serve out the balance lock-in period. It is mandatory to do so in case of the old Reserve Bank of India’s 7.75% Bonds (discontinued since May 2020), on the demise of the asset owner. While some RBI Bonds have been discontinued for fresh purchases, the holders continue to stay invested until 2028 as the lock-in period varies from 4-8 years based on age of investor.
These bonds are low-risk instruments that help the government raise funds for projects and can be purchased directly from RBI, other banks or stock brokers.
“In case of RBI bonds, the nominee or the legal heir or beneficiary can be transferred the units, but they can withdraw only after the residual portion of the lock-in period is over," says Dutta of Inheritance Needs Services.
While the Government Securities Act 2006 doesn’t mention this restriction on redemption, there have been RBI circulars and real-time cases which indicate the restrictions.
A Chennai-based lady had invested in RBI 7.75% bonds and her husband passed away. Since there was no nominee enlisted and no will, Dutta had to secure a Letter of Administration (LOA) from Bombay high court.
“Armed with the LOA, we submitted our application with the RBI through the bank, which followed the procedure and carried out transmission in favour of the nominee. But the redemption was possible only on completion of the balance tenure," says Dutta.
The balance tenure needs to be completed because the funds are invested in long-term infrastructure projects and, hence, cannot be redeemed prematurely, Dutta explains.
The concern of withdrawal continues even with the currently issued RBI bonds. "Even though the RBI Floating Rate Bonds operational today can get transmitted to the nominee, it is not clear from the circular whether the nominee would be allowed to withdraw before maturity," says financial planner Sandeep Shanbhag.
Bank fixed deposits
For bank FDs, including the 5-year lock-in FD that qualifies for a tax deduction is more flexible with the lock-in.
“It is not mandatory for the nominee or legal heir to serve the remaining lock-in period. They may choose to either continue the deposit until maturity or opt for premature withdrawal. Based on their instructions, the bank may allow early liquidation of the deposit along with accrued interest," says Tarun Sharma, Head – Liability Products and Payments, Kotak Mahindra Bank.
However, since early liquidation, too, can attract an interest rate penalty, would the same be applicable to these complicated transactions? “Banks allow premature closure of such deposits without levying any penalty, even if the deposit has not completed the lock-in period," clarifies Sharma.
Senior Citizen Savings Scheme (SCSS)
Once a senior citizen opens an SCSS account, then the investments are locked-in for the initial five years. However, since these investments are held by seniors, the lock-in is waived off upon death.
The heirs needn’t serve out the balance lock-in period.
“SCSS, on death of account holder, the principal and the accrued interest is paid to the nominee or legal heirs without any penalty," says Shailendra Dubey, Partner at PlanMyEstate Advisors.
Other small savings
There are several investments such as Public Provident Fund (15-year lock-in), Kisan Vikas Patra (2.5-year lock-in). Here again, the Postal Office norms state that upon submission of forms and completion of formalities, the funds are transferred to the nominee or legal heir irrespective of the lock-in period.
Conclusion
Before you fight with authorities to release the funds after the death of a kin, beware of these clauses applicable for products with lock-in period. However, understand that you would not receive any intimation once the lock-in is removed, as withdrawal of funds isn’t mandatory after the lock-in period ends. One can continue to stay invested and redeem at an appropriate time based on the stock-market conditions (where market-linked) for better returns.
topics
