The tragic death of 40-year-old marketing professional V. Panda in January 2024 revealed critical gaps in financial inheritance planning that every Indian investor should understand. Nearly two years later, while most of Panda's assets have been successfully transferred to his parents and liquidated, two tax-saving mutual fund investments worth ₹6.75 lakh remain completely inaccessible due to mandatory lock-in periods.
This case highlights a widespread issue affecting countless Indian families when dealing with inherited investments that have lock-in restrictions. Unlike problems with documentation or legal hurdles, this situation stems purely from product-specific rules that continue to bind the funds even after the original investor's death.
Understanding Lock-In Periods Across Investment Products
Lock-in periods aren't limited to just Equity-Linked Savings Schemes (ELSS). Several popular investment vehicles in India come with varying lock-in durations that can complicate inheritance. Five-year lock-ins apply to tax-saving fixed deposits, Post Office Small Savings Schemes, and Retirement Funds and Children's Funds under mutual funds.
The transfer process for these investments involves two critical stages upon an investor's death. First, the investments must be formally transferred to the nominee or legal heir. Second, the actual redemption of funds can only occur based on the specific lock-in rules of each product.
Rajat Dutta, founding director of Inheritance Needs Services, explains: "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."
Mutual Fund Inheritance Rules: ELSS vs Other Schemes
When dealing with mutual fund inheritance, the type of scheme dramatically affects how quickly heirs can access the money. While assets can be transferred to nominees relatively quickly with proper documentation, liquidation timelines vary significantly.
For ELSS funds with a standard 3-year lock-in, a special provision applies in case of the investor's death. Hemant Rustagi, founder and director at Wiseinvest, clarifies: "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."
Consider this example: If someone invested in ELSS in January 2025 and passed away in June 2025, the units transfer to the nominee immediately. However, the nominee cannot sell these units before January 2026, despite the full lock-in ending only in January 2028.
The Mirae Asset ELSS scheme document explicitly states: "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."
For other closed-ended funds like Retirement Funds and Children's Funds with 5-year lock-ins, the situation becomes more complicated. An operations head from a leading fund house revealed: "Under Retirement funds and Children funds, there are no regulatory provisions and everything depends on the fund house's internal policy."
RBI Bonds and Other Fixed Income Instruments
Mutual funds aren't the only instruments where lock-in periods persist after death. The scenario becomes particularly challenging with RBI bonds, including the discontinued Tax-Saving Bonds and 7.75% Bonds.
Dutta explains the restriction: "In case of RBI bonds, the nominee or the legal heir can be transferred the units, but they can withdraw only after the residual portion of the lock-in period is over."
He cites a real case involving a Chennai-based woman whose husband had invested in tax-free RBI bonds. Despite obtaining a Letter of Administration from Bombay High Court, the funds remained locked until the completion of the balance tenure. The underlying reason: these bonds fund long-term infrastructure projects, making premature redemption impossible.
However, not all fixed-income investments maintain strict lock-ins after death. Bank fixed deposits, including 5-year tax-saving FDs, offer more flexibility. Tarun Sharma, Head of Liability Products and Payments at Kotak Mahindra Bank, confirms: "It is not mandatory for the nominee or legal heir to serve the remaining lock-in period. Banks allow premature closure of such deposits without levying any penalty."
Similarly, Senior Citizen Savings Scheme (SCSS) accounts waive lock-in restrictions upon the account holder's death. Shailendra Dubey, Partner at PlanMyEstate Advisors, states: "SCSS, on death of account holder, the principal and the accrued interest is paid to the nominee or legal heirs without any penalty."
Other small savings schemes like Public Provident Fund (15-year lock-in) and Kisan Vikas Patra (2.5-year lock-in) also permit full transfer to heirs regardless of lock-in status, following Postal Office norms.
Critical Lessons for Indian Investors
The cases of V. Panda and the unnamed NRI whose father held RBI bonds maturing in 2026 underscore several crucial points for financial planning. First, understanding lock-in rules is as important as selecting investments themselves. Second, investors should maintain clear documentation and ensure nominations are properly filed for all financial instruments.
Most importantly, heirs should recognize that no automatic notification occurs when lock-in periods end. The responsibility to track maturity dates and initiate redemption lies entirely with the beneficiaries. Furthermore, redemption isn't mandatory after lock-in completion—heirs can choose to remain invested for potentially better returns, particularly in market-linked instruments.
As Indian investors increasingly diversify across various locked-in products, comprehending these inheritance nuances becomes essential for ensuring that hard-earned money serves its intended purpose for loved ones, even in unforeseen circumstances.
