FinBytes by Finwisor – Mutual Fund Dividend Option

While dividend option in mutual funds hasn't been a good option for quite some time, it may have got worse for some owing to recent changes. If you have invested in mutual fund schemes with dividend option, you should take note. As always, basics first.

What is dividend option and growth option?

In every mutual fund scheme, there are 2 major options to invest- growth and dividend. Broadly speaking, in the growth option, your earnings are reflected in the growth of Mutual Fund’s Value (NAV). In the dividend option, these earnings are returned to the investor as a dividend at regular intervals.

Changes in Mutual Fund Dividend taxation

While earlier, the AMC (managers of Mutual Fund amount) paid dividend distribution tax (DDT) on the dividend, so the dividend was not taxed in the hands of investors. However, from 1st April, 2020, this dividend will be taxed in the hands of investors.

Analysis

Earlier: DDT on Equity funds was 11.648%.

Now: Dividend will be taxable at slab rates. If you are an equity investor in slabs of 15%+ the changes will be detrimental to you.

TDS and exemption

TDS is applicable at 10% (above Rs.5000/-) in most cases of individuals. (20% TDS in cases where PAN Card is not registered). Practically, however, all AMCs will charge TDS on the whole amount in the absence of adequate information.

In any case, all dividend option investors are better off by opting for SWP for Fixed Income.

SWP Option for Fixed Income

For those who depend on dividend for fixed income, you may switch to growth option and set up an SWP (Systematic Withdrawal Plan). Here you may decide the amount you want to withdraw at regular intervals. SWP is treated as redemption and hence capital gains taxation applies which is much more tax effective. If redemption is made post 1 year in equity schemes, capital gains of upto Rs 1 Lac are exempt every year.

About FinBytes

While most people understand the importance of managing personal finance, they are left with little time to do anything meaningful about it. So, we at Finwisor thought of helping. FinBytes are short and simple 1-2 minute reads every week to improve financial awareness. Do make it a point to read these weekly FinBytes regularly to improve your financial quotient.

This is a free service. Those who want to get these FinBytes on their WhatsApp may message "START (Your Full Name)" to +91 8369103997 or click on this link

Follow Us: Website | Facebook | LinkedIn

Wishing you all financial freedom :)