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Reinvested ELSS Dividends

A tax-saving fund's dividend reinvestment option can turn out to be an endless trap…

I had invested in HDFC Taxsaver in 2006 in the dividend reinvestment mode. Now I want to sell the units, but my financial adviser is saying that as it has 3-year lock in period so for the dividend declared it must have three year completion. Going by this logic, I will never be able to completely sell my units. Please advise.
- Amit Gautam

Your financial adviser is right with his observation. Opting for dividend re-investment is like getting into an endless trap where one finds the 3-year lock-in to get into an endless cycle. However, there is a way to get out of this situation. Most fund houses allow you to switch from a dividend reinvestment option to a dividend option. For this, you need to write a letter, requesting for a change and/or fill up a “change in option” slip at the bottom of your account statement. There is another way to look at your situation; you can redeem the units that have completed the mandatory three-year lock-in. Also, you can claim the tax benefit on the reinvested dividend amount in tax planning funds in the financial year in which the dividend is received. As tax planning funds are equity oriented funds, the dividend earned from equity oriented funds are tax free. This will enable you to reduce your tax burden.

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