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Mutual Fund Investors Can Rest Easy

Union Budget 2016 has made dividends received from companies in excess of Rs 10 lakh taxable at 10% rate.

Mar 15, 2016 / 12:04 PM IST
Arnav Pandya

There is a new provision that deals with the taxation of dividends when they cross Rs 10 lakh mark for an investor in the year. This has caused some concern among investors because they want to know whether all kinds of dividends will be covered under this and whether their mutual fund dividends too should be given the same treatment. The exact classification of the dividend is important because it could be that when all the sources are taken together then several additional investors would be covered and hence might end up having to pay the tax. Here is a detailed look at the issue and how the dividends received from mutual funds should be handled.

Nature of dividend

If one looks carefully at the types of dividend that are covered under the new provisions then it is clearly mentioned that the dividend that gets the benefit under Section 10(34) and then covered under Section 115-O would be the ones where the new conditions will be applied. If one looks at the details then Section 10(34) covers dividends from companies where securities transaction tax has been paid and this is currently exempt. It does not bring the dividend from mutual funds into the coverage because this is presently getting the tax benefit under a separate section 10(35) and hence this is different. This would mean that when the individual is looking to see whether they are covered under this new tax net and if they have to pay an additional tax then they should be adding up the dividends that they receive from companies and if this crosses the Rs 10 lakh mark then they would need to pay the additional amount.

Equity MF dividend

The good news for the investor does not end there because while there would not be any additional tax that they would face on their mutual fund dividends there is something else that they need to take in to account. When it comes to mutual funds there is a tax benefit on the dividends that they will receive and this continues without any break up. So as far as equity oriented mutual funds are considered there is no tax on the dividends that are received by the investor without any limit. The investor can thus have a high value portfolio in mutual funds and earn dividends without any worry of a tax impact. The other part is that there is no indirect impact on the investor also because there is no dividend distribution tax on equity oriented funds so the classification of a fund under this category means no tax impact on the payouts.

Debt mutual fund

The situation will change relatively when it comes to debt mutual funds but for those in the highest tax bracket there is still some benefit as compared to other tax provisions. The receipt of the dividends from debt oriented mutual funds remains tax free in the hands of the investor. This would mean that any amount received as dividends does not have a tax to be paid but this does not mean that there is no tax impact. There is an indirect impact that the individual will face due to the fact that there is a dividend distribution tax on debt oriented funds. This will go upto 28.3% for individuals and hence this becomes their cost because the amount is adjusted in the net asset value of the fund. Those who fall in the highest 30% tax bracket will find that the rate of tax on the dividends is lower than what they would face on their income. For others the better option would be to go in for the growth option in the fund which would translate into a lower tax because they fall into a lower tax bracket.

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