Mutual funds have changed drastically after the budget 2020. Where savvy mutual funds, investors choose dividend options as a tax-saving technique might be changed.
For a savvy mutual fund investor, who chose the dividend option for tax arbitrage, the shifting of goal post in the form of dividend distribution tax (DDT) by Finance Minister Nirmala Sitharaman in the Budget for coming fiscal has offered a tricky situation.
These mutual fund investors were using the dividend option to save the difference between their higher tax slab and the applicable DDT rates. With the Budget proposal stating that dividend received by shareholders will be taxed as per the investor's tax slab, it will be ideal for mutual fund investors falling in higher tax brackets to shift from dividend to growth option. Also, going by the proposed changes, any dividend income from mutual funds above Rs 5,000 will attract TDS at a rate of 10 per cent under the newly introduced Section 194K.
With dividends becoming taxable at the marginal slab rate of the investor from April 1, this year, shifting from dividend option to the growth option will be a viable option. As against slab rates, under the growth option, there will be defined taxation rates. Also, unlike dividends declared by the mutual fund company, the investor can decide when to book profit in growth option.
However, according to market analysts, investors are advised to carefully analyse the cash flow needs before opting between the dividend or growth option. Mutual funds cater to two types of investor needs, one in which investor can withdraw a fixed amount every month and the other, where an investor withdraws only the capital appreciation and not the initial capital. If it is regular income that you are looking for, to meet daily requirements or if you are a pensioner, then one should pick the dividend option. If you are aiming to make your money grow over the long term to meet your future plans, then you should take into consideration the compounding benefits and go for the growth option.
If you want to plan it based on which tax bracket you fall, then experts calculate that those whose tax bracket is between 20 to 30 per cent should consider growth option while investors whose tax bracket is below Rs 15 lakh a year can continue with dividend option.
According to the data with mutual fund houses, the quantum of dividend being distributed has come down ever since the introduction of dividend distribution tax. However, since investments are done for wealth creation or regular cash flow in the form of dividends, a switch to the growth option is advisable for a mutual fund investor is he/ she is in lower tax bracket and is aiming at higher quantum being received as a dividend.On the flip side, the growth option on a mutual fund means that an investor will not be receiving any dividends that may be paid out by the stocks in the mutual fund. By selecting a growth option, the mutual fund holder is allowing the fund company to reinvest the money it would otherwise payout to him/her in the form of a dividend. It is this money that increases the net asset value (NAV) of the mutual fund.
Subscribe to Moneycontrol Pro's Annual plan for Rs 399/- for the first year. Use coupon PRO2020 (Available on Web & Android only).