With the April 1 deadline - from when investors will have to bear tax on dividends - inching closer, mutual fund houses are helping by reducing the cost burden.
Sundaram Mutual Fund has become the first fund house to waive off exit load for switching out from dividend option to growth option in an equity scheme.
Most fund houses are contemplating a similar move to waive off exit load or may give other incentives to retain investors.
“In order to reduce the cost burden on investors if they so choose, Sundaram Mutual has announced the waiver of exit load from redemption in many of our schemes up to 25 percent of the investment value per annum if done through STP (systematic transfer plan) mode,” said Sunil Subramaniam, Managing Director and Chief Executive Officer - Sundaram Mutual Fund.
Sundaram Mutual Fund has announced changes in exit loads of all open-ended equity schemes, including Sundaram Global Brand Fund, Sundaram Equity Hybrid Fund, Sundaram Arbitrage Fund, and Sundaram Medium Term Bond Fund.
Sundaram Mutual Fund said, that if more than 25 percent of the units are redeemed or withdrawn by way of Systematic Withdrawal Plan (SWP) within 365 days from the date of allotment, an exit load of 1 percent of the applicable net asset value (NAV) will be charged.
The company will also waive exit load on intra-scheme and inter-scheme switch-outs for all purchase transactions from March 2. Currently, an exit load of 1 percent is imposed on such transactions.
Others to follow
"We are still in the discussion stage about giving benefits to the investors for switching from dividend to growth. It could be in the form of waiving exit load or any other offers," said a fund manager from a mid-sized mutual fund house.
One of the offers planned is for MF schemes with dividend plans to make these investment options attractive for investors. This would be done through tweaking the exit load structure of dividend plans in favor of investors.
Most fund houses charge 1 percent for redemption within 12 months from the date of allotment.
While presenting Union Budget 2020, Finance Minister Nirmala Sitharaman announced that the government would abolish the dividend distribution tax (DDT).
The Union Budget also introduced a deduction of tax on dividends paid by mutual funds.
Though the dividend received through mutual funds is not getting taxed anymore, the same will be added to the income of the investor and taxed at the marginal rate of tax.
Not only this, the Finance Bill 2020 contains a provision that the mutual funds need to deduct tax at source (TDS) at 10 percent if the dividend payout is more than Rs 5,000.
So, mutual funds investors including retail, high-networth investors (HNIs) or Ultra HNIs that have opted for dividend option of a scheme have to take a huge hit as they will have to pay a tax on the dividend included in their income.
“The recent budget has removed the DDT and made dividends taxable at the hands of the investor. Hence, distributors/advisors should consider using SWPs (Systematic Withdrawal Plans) as a more tax-efficient option for investors to earn a regular income from mutual fund schemes,” Subramaniam said.
Earlier, mutual funds deducted the DDT of 11.64 percent on dividends declared by the equity mutual funds.
For the bond funds, the DDT was charged at 29.12 percent. Removal of DDT will benefit investors who are taxed at a lower rate of tax as compared to the dividend distribution tax.
This is especially the case when one receives dividends from bond funds. For an individual in the 20 percent tax bracket, the earlier rate of DDT of 29.12 percent was penalising.
A mutual expert said that the choice of whether to pay tax on dividend or switch over to growth plan in the same equity scheme is now in the hands of investors instead of mutual funds.
The MF industry will also have a level playing field in promoting both growth and dividend plans as per investor appetite, added the expert.