In an interview to CNBC-TV18, Anil Rego of Right Horizons explained the concept of dividend distribution tax (DDT) and the impact of the proposed change in DDT on debt mutual funds.
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Below is a verbatim transcript of the interview:
Q: What will be the impact of the proposed change in dividend distribution tax on debt mutual funds?
A: Dividend distribution tax is basically payable on your debt mutual funds, whatever dividend is paid are deducted at source.
How does it impact and what is the change that the government has come out with? In the last Budget, it has been proposed to move all debt funds at 25 percent. Currently, the dividend distribution tax is 25 percent only for liquid funds. This means that anything which is non-liquid fund investment now comes off into the 25 percent bracket plus you pay surcharge and cess.
What does it mean to an investor? If you are looking at debt-mutual funds, use a growth option for a long term investor. For a short term investor with less than one year time period, it is a bad news. Tax efficiency is not the reason to invest in debt funds anymore.
Q: Do they become more attractive or do they remain more attractive than fixed deposits (FD)? Or should you tax deducted prefer FDs at this juncture?
A: Right now, in the short-term, they will be almost equal to FDs in terms of tax treatment. However, short-term interest rates on liquid funds maybe better than that of let us say an FD of a short-term. Plus, liquid funds also give you flexibility. You can keep it for any number of days. For an FD, you have to fix it for three months of six months. I can just keep it for 50 days or whatever period I need it for.
Q: Caller can invest Rs 5,000 in health insurance plan. What would be the advice to him?
A: It is a good idea that he is looking for health insurance at an early stage. In fact, health insurance and health related costs are becoming a huge risk on your financial planning, etc.
I would suggest the caller to look at a family floater. If he is married then he could include the family members. He can also look at including his parents in it. He would probably get about Rs 3-4 lakh of cover depending on the features, etc of the policy.
Again, one can choose feature rich policies like Max or Apollo but they maybe a little costlier. You can look at even some of the public sector undertaking (PSU) names. There are private sector guys as well. I would suggest to look at a combination of pricing, you get comparative pricing across all insurance companies very easily today.
Apart from that, look at the features and then choose what is best for you. It is a good idea that you are looking at doing your medical insurance at this time.