Lock in period is the period for which the funds of the investor is locked in , in the hands of the institutions in which the fund is deposited. The investment will not be allowed to redeem the investment before the lock in period ends. This is more pronounced in investments which offer Tax Benefits by way of exemption under section 80C of Income Tax Act, 1961.
Example – Lock in period
For example, Banks offer Tax savings fixed deposits schemes with lock in period of 5 years. The minimum term of deposit is 5 years and can go up to 10 years. If one invests in this product, he will not be able prematurely close it before 5 years irrespective of the total term of the deposit. Neither he will be able to avail loan against this fixed deposit before the 5 years term is completed. He however will be able to avail exemption under section 80C of Income Tax Act, 1961 for the amount of the fixed deposit.
Lock in period in other investments
Various insurance policies and mutual fund schemes which offer exemption under section 80C have a lock in period of 3 years, meaning that they can’t be redeemed before the policy has been in force for at least 3 years.