ELSS Dividend Reinvestment Option Discontinued
Tax Savings Mutual Funds aka Equity Linked Savings Scheme (ELSS) has undergone a major change. The Association of Mutual Funds of India (AMFI) has instructed Mutual Fund houses to discontinue the Dividend Reinvestment Plan under ELSS.
What benefits does ELSS offers?
Equity Linked Savings Scheme (ELSS) offers tax savings on the investment made in the equity market through mutual fund route under section 80C. The threshold limit is Rs.1.5 lakh including others investment options under section 80C. 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.
Why ELSS dividend reinvestment option is weeded out?
ELSS funds come with two options i.e. growth plan and dividend plan. Dividend plan was further divided into dividend payout option and dividend reinvestment option.
The problem arises with the dividend reinvestment option is that every time when dividend is declared by the mutual fund, it automatically gets invested in the same scheme and the new units allotted would again come with the lock-in-period of 3 years. Thus it becomes the loop which makes it impossible for the investor to take out the whole balance.
What is Dividend Transfer Plan (DTP)?
To overcome this problem AMFI after discussion with SEBI has come out with Dividend Transfer Plan (DTP). DTP enables investors to invest the dividend declared by one mutual fund scheme into another mutual fund scheme. Investors have to simply fill up the form and submit it to the AMC or the registrar, stating the new mutual fund scheme to transfer the dividend declared by ELSS funds.
What happens to the existing holders who had opted for dividend reinvestment option?
The investors who had opted dividend reinvestment option will now automatically gets converted to dividend payout option. In case the investors do not wish to receive dividend than they can go for the dividend transfer plan.
What are the best tax savings ELSS Funds?
Recommended Read: Tax Savings with ELSS Mutual Funds
Words of Wisdom
Many Mutual Fund Houses have certain conditions which are needed to fulfill for dividend transfer plan. One such condition is that the dividend will be invested in new scheme only if the amount is Rs.500 or above, else the amount will get credited to the investor account. So do check and read all the conditions while filing up the DTP form with your AMC or registrar.