Eq­uity mu­tual funds just be­came less at­trac­tive with the dividend dis­tri­bu­tion tax

India Today - - SMART MONEY | DIVIDEND VS GROWTH - —Kun­dan Kishore

In the bud­get this year, Union fi­nance min­is­ter Arun Jait­ley an­nounced that dividend in­come from eq­uity and eq­uity mu­tual fund schemes would hence­forth at­tract dividend dis­tri­bu­tion tax (DDT) of 10 per cent. What does this mean for your ex­ist­ing mu­tual funds that pay a reg­u­lar dividend? Does it call for a tweak in your over­all in­vest­ment strat­egy?

The dividend op­tion of mu­tual funds has been pop­u­lar with in­vestors look­ing for a reg­u­lar cash flow, es­pe­cially from eq­uity-ori­ented hy­brid funds. How­ever, as Rad­hika Gupta, CEO, Edel­weiss Mu­tual Fund, says, “Eq­uity Mu­tual Funds of­fer­ing monthly dividend have be­come less at­trac­tive after the in­tro­duc­tion of tax­a­tion on dividend in­come in the last bud­get.” What are your op­tions then for ex­ist­ing and fresh in­vest­ments?

EX­IST­ING IN­VEST­MENT If you have se­lected the dividend op­tion in your ex­ist­ing in­vest­ment or sys­tem­atic in­vest­ment plan (SIP), change over to the growth op­tion. You can do this by sub­mit­ting a writ­ten ap­pli­ca­tion to your fund house. For tax-sav­ing schemes or eq­uity-linked sav­ing schemes (ELSS), you need to wait un­til the lockin pe­riod gets over.

How­ever, you need to keep a few things in mind while con­sid­er­ing the other in­vest­ment op­tion. The switch from one op­tion to another is treated as re­demp­tion from one op­tion and in­vest­ment in the other op­tion of the same scheme. It may, there­fore, at­tract an exit load as well as short­term cap­i­tal gains tax if the pe­riod of your in­vest­ment was less than 365 days.

NEW IN­VEST­MENTS Ex­perts ad­vise ex­er­cis­ing the growth op­tion for fresh in­vest­ments un­der the new tax regime. “The growth op­tion is the best op­tion in the post-eq­uity Long Term Cap­i­tal Gains (LTCG) tax sce­nario, par­tic­u­larly be­cause of the 10 per cent DDT on div­i­dends from eq­uity,” says Rahul Parikh, CEO, Ba­jaj Cap­i­tal. Not rein­vest­ing this dividend in a sim­i­lar in­stru­ment en­tails an op­por­tu­nity cost, he adds. If rein­vested and then held for more than a year, it again at­tracts LTCG tax on profit above a lakh.

If you need a reg­u­lar cash flow from your in­vest­ment, you may still con­sider the growth op­tion. “Mu­tual funds of­fer fa­cil­i­ties like the Sys­tem­atic With­drawal Plan or SWP, in which in­vestors can opt for reg­u­lar cash flow in the growth op­tion depend­ing on their in­di­vid­ual re­quire­ments. In this op­tion, cap­i­tal gains up to Rs 1 lakh are ex­empt from tax,” says Gupta. The ad­van­tage of SWPs is that an in­vestor can reg­u­late the amount of cash flow in ac­cor­dance with his needs, un­like the dividend op­tion which re­lies on dis­tributable sur­plus and pre­vail­ing mar­ket con­di­tions.

All is not lost in the new tax regime. Some wise plan­ning and you can still make hand­some re­turns on your in­vest­ment.

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