Equity Linked Savings Scheme(ELSS) is one of the best tax saving options that we have right now. Mutual Fund houses have around Rs 36,257 crore as Assets Under Management (AUM) under various ELSS plans.
ELSS Mutual Funds offer tax benefits on the investments made under Section 80C of Income Tax Act, 1961. Also the redemption amount of ELSS is not taxable as the minimum lock-in-period of 3 years makes it long term assets which is tax-free under section 10(38) of Income Tax Act,1961.
While investing in mutual funds, you generally have two options, ‘Growth option’ or ‘Dividend option.’ You have to select either of it. Most of the Mutual Fund schemes (whether equity or debt oriented) offer both the choices/plans to its investors.
The ‘Dividend’ option has two more sub-options. They are ‘Dividend Pay-out’ plan and ‘Dividend Re-investment plan.’
(Investors who seek long term wealth creation generally opt for ‘Growth’ option. Investors seeking regular income invest in ‘Dividend Payout option.’ While dividend payout option pays the dividend declared by mutual fund to the investor, dividend reinvestment option reinvests dividend amount in the scheme itself.)
What is the lock-in period for ELSS Funds?
You may be aware of the fact that ELSS Funds have a 3 year lock-in period. This is applicable for both lump sum and SIP (Systematic Investment Plans) investments. Mutual Fund Units that are allotted under each SIP installment have 3 year lock-in period.
What is the issue with ELSS Dividend Reinvestment option?
Investments in tax saving ELSS (whether lump sum or SIP) with Growth and Dividend Payout plans do not have any issues.
But, let us say an investor chooses ‘Dividend Reinvestment option’ while investing in Equity Linked Saving Scheme. What happens in this case when AMC (Asset Management Company) declares dividends?
Each unit allotted to the investor after a dividend announcement is reinvested in the scheme. These newly allotted units get locked-in again for three years. This leads to a loop of transactions that keep investing money in scheme, which further makes it difficult to withdraw the entire balance.
Investors who wish to redeem/withdraw all the units (the entire balance including dividend reinvested) after three year lock-in period of the original investment cannot do so, due to lock-in of each transaction of dividend reinvestment, leading to confusion and investor grievances.
(Even if an investor does not opt for ‘Dividend payout sub-option’ under the ‘Dividend plan’, the default option is treated as ‘dividend reinvestment’ only)
This matter was discussed by SEBI (Securities and Exchange Board of India) with AMFI (Association of Mutual Funds in India) recently. After examining the issue, the AMFI committee on Operations and Compliance recommended that ELSS dividend reinvestment should be discontinued to avoid any confusion in the minds of investors. Some AMCs have already discontinued dividend re-investment options in their ELSS schemes.
Discontinuance of ELSS Dividend Reinvestment option: Impact on Existing & New investors
Going forward the mutual fund houses do not offer ‘Dividend Reinvestment’ option for their ELSS tax saving MF schemes. These schemes will have two options – Growth (or) Dividend payout only.
The existing unit holders of ELSS schemes (who opted for reinvestment option) will get dividend payouts whenever AMCs declare dividends. AMCs will convert the outstanding units under dividend re-investment option into dividend payout. The dividend monies will be credited to investors’ bank accounts. This is applicable to existing SIPs too.
The existing Investors who do not wish to receive dividend payout can opt for a Dividend Transfer Plan (DTP) through which they can invest the dividend in any open end scheme within the same fund house. If you want to opt for DTP, you have to submit DTP form to the respective AMCs (mutual fund houses). DTP form can also be submitted to Registrars or Transfer Agents (CAMS, KARVY etc.,).
Kindly note that some mutual fund houses may have ‘minimum dividend amount’ condition (like dividend amount should be atleast Rs 100 or so) to execute dividend transfer transactions. If the dividend so declared is less than this, then the money is credited to investor’s bank account irrespective of his/her dividend transfer instruction.
(Important point : The dividend reinvested amount does not qualify for any income tax deduction under Section 80c) (Image courtesy of junpinzon at FreeDigitalPhotos.net) (You may like visiting my post on “Top 5 Best ELSS Mutual Funds to invest in 2015.”)
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Is DDT applicable to both equity and debt mutual funds ?
Dear Rakesh..There is no dividend distribution tax (DDT) on equity mutual funds
Are the Mutual Funds required to pay Dividend distribution Tax for Dividend Pay out as well as Dividend Re-investment ?
In case Tax is applicable, Is the Growth Option better as it do not attract to pay Tax?
Dear Sunit,
The dividend that is reinvested is subject to DDT. Same is the case with Dividend payout.
Growth Vs dividend should be based on your investment objective ie whether to accumulate long-term wealth or to get income from the investments.
I want to know whether Dividend Re-investment Plan of MF is better or Growth Plan in respect of long term accumulation of wealth ?
Dear Sunit..If you are looking at long-term, you can consider Growth option.
Suggest you to read this article….
Has the Dividend Reinvestment Option in all the mutual fund schemes been phased out or is it valid only to the ELSS schemes.
Dear Rakesh..It’s applicable only to ELSS tax saving funds.
hi sir,
you are doing a wonderful job by helping to save money,
i want to ask that i want to go for elss so whats the procedure to opt for it.
then what shud be the ideal money to invest in it,
as i want to invest 2-3k on a monthly basis for a term of 5 -6 years as i dont have a lumpsum amount so kindly guide me on the same
sorry wanted to add that i am 26 years old unmarried guy, i also invest in ppf around 30-40k annually but i also want to plan for 8-10 years of investment by elss so suggest me how to invest in that and what amount of money shud be invested in elss on monthly basis, and whether shud i opt for lic new jeevan aanand policy of rs 5L rs,
and i have also purchased a health policy of star health of 5 lac rs.
as i am unmarried i want to increase my corpus saving at the end of 10years from now..so kindly guide me
Dear Ajay,
The quantum of money should based on your investment objective & financial goal.
Are you a salaried individual? Do you contribute to EPF scheme?
Kindly avoid buying traditional insurance plans. Kindly read : Term insurance Vs traditional plans.
If you do not have any family member(s) who is financially dependent on you, you may postpone buying a term plan.
But consider buying a personal accident insurance plan & health cover.
Read:
Best Personal Accident insurance plans.
Best portal to compare health insurance plans.
i am salaried but i do not contribute to epf. i have taken star health policy comprehensive for me rite now. i do contribute to ppf rs 30k around so i wanted to invest in elss also so kindly guide me.i am planning for long term investment around 6-7 years
Dear AJAY,
You may select one fund out of these three : Franklin Tax shield or axis LTD or ICICI Tax plan.
Kindly read : Best ELSS funds.
Dear Sreekanth,
First of all, kindly accept my heartily congratulations for doing the great job of helping retail investors. Well my problem is to choose between a good pension plan and a good ELSS AND both these options I want to exercise purely for tax saving. Please help.
Thanks.
Dear Pankaj..Suggest you to opt for ELSS fund. Let me know your investment horizon??
Kindly read : Think beyond Taxes before investing!
Dear sir,
I want to start investing in MF via SIP option that too tax saving ELSS but i am not sure which MF is best for handsome returns and hassle free payout.
I approached BIRLA SUN LIFE ..
Please suggest me
Dear Raj,
Kindly read my article on Best ELSS funds. You may consider Franklin Taxshield or Axis long-term equity fund.
I recently come across this blog and found very informative and to the point explanation.
I have some confusion regarding the dividend pay out by stock company to Mutual fund holding that stock. I want to know that whether those amount of dividend are reinvested in fund or else?
Dear Paras,
Thank you and nice to know that you are enjoying reading my blog posts.
Mutual fund houses do not disclose ‘the total dividends’ that they receive from the stocks they own in their investment portfolios. In India, we have stringent regulations regarding NAV calculation, fund accounting etc.,Mutual funds are well regulated financial products.
If a fund receives dividends from its portfolio companies you can be assured that it will increase the returns to the investor in form of increased NAV (Net Asset Value). Dividend earned by a Scheme is shown as income in annual Profit ,Loss Statement of Mutual Fund Scheme.