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Should I go with the Growth or Dividend option of an ELSS?

Growth option is far more compelling and tax-efficient. Here is why.

I have invested in the direct plan of an ELSS scheme and selected the growth option. However, I have been told that the dividend option should be chosen. Why is this so? Should I shift from the growth to dividend option?
- Vimala

No, you have taken the right decision of investing in the growth option. You should completely ignore the advice regarding the superiority of the dividend option and continue with the growth option. Contrary to the general perception, a dividend is not something extra that you get. In fact, the dividend option happens to be much less tax-efficient going by the current tax laws. Just to explain that further, the dividend that you receive is added to your income and taxed as per the slab system. So, if you are in the 30 per cent tax bracket, then you pay 30 per cent tax on the dividend that you receive.

On the other hand, in the growth option, the capital appreciation that you achieve as and when you sell your fund are taxed at the rate of 10 per cent if the holding period has been more than one year. And that, too, after the threshold of Rs 1 lakh, which is exempt from tax. The first 1 lakh long-term capital gains from equity that you make in any financial year are exempt from tax. If your holding period is less than a year, the gains are taxed at 15 per cent. On these counts, the growth option happens to be the most efficient one.

The other point to note is that in the case of dividends, your entire dividend income is subject to tax. But in the case of the growth option, it is only the capital appreciation bit. Let's say in a particular year, you get Rs 10,000 as a dividend income. Now this entire Rs 10,000 will be added to your income and subjected to tax. On the other hand, in the growth option, let's say you redeem your units worth Rs 10,000, then this entire 10,000 will not be put to tax. Only the capital gains bit of this Rs 10,000 will be put to tax after the Rs 1 lakh threshold if the units are sold after a year.

So clearly, the growth option is far more compelling and far more tax-efficient and you should continue to stay invested in it.

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