Choose funds smartly, pay less tax

Choosing right

There is no DDT in equity funds, and short-term and long-term capital gains are taxed as per what's given below irrespective of the tax bracket.

- If you are investing for less than one year, stick to the dividend option. Those of you who do not qualify for tax, should also opt for dividend option because of the short-term capital gain.

- If you are investing for more than one year, select growth option.

Note: International Equity Funds are taxed just like debt funds for short-term and long-term capital gain. Also there is a DDT of 14.1625% on dividend declared.

Tip 1: If you invest in Equity Linked Savings Scheme (ELSS), then do not opt for Dividend Reinvestment. As they are tax saving instruments they have lock in period of three years. So, when dividend gets reinvested, the units you earn are locked in for further three years.

Tip 2: Investors opting for Systematic Investment Plan (SIP) should go for growth option because your objective is to create wealth.

Your financial needs and goals:

Regular income: If you are looking for a regular income, opt for dividend payout. But remember that the fund house does not declare a dividend when you need the money.

Long-term saving: Opt for the growth option. If you are investing to build a retirement nest, then you should opt for dividend reinvestment and gain from compounding effect as the capital is ploughed back into the fund.