Taking stock of your MF investments

Mutual fund investors are often unsure whether to opt for the dividend or growth option of their mutual fund investments. Many inexperienced investors go for the dividend option in the hope of getting some additional income. However, unlike shares, mutual fund dividends are your own money, and not additional income.Finance minister Nirmala Sitharaman has, in the Union budget, proposed the abolition of the dividend distribution tax (DDT), which made dividend payments taxable. In the new dispensation, dividend receipts will be taxed in the hands of individual investors. The percentage of the tax will be as per one's income tax bracket. According to Crisil, 'The abolition of DDT at source will increase money in the hands of investors in the lower tax brackets and remove the double taxation impact on mutual fund investors. But it might increase the tax liability of investors in the higher tax brackets, especially equity and debt fund investors, who earlier paid 10 per cent and 25 per cent tax, respectively."What's DIFFERENT?So far, mutual funds were paying DDT before handing over dividends to investors. DDT was levied at 10 per cent for equity schemes and 25 per cent for debt schemes, excluding the applicable surcharge (12 per cent) and cess (4 per cent)..preferred-source-banner{ margin-top: 10px; margin-bottom:10px;}Under equity schemes, if dividend worth Rs 10,000 was to be distributed, then Rs 1,000 would be deducted as tax. Under debt schemes, the amount paid after tax would reduce to Rs 7,500. After the budget proposal, investors will have to mention the dividend received under the head of 'Other Income' in their income tax returns. "DDT has been removed, but taxpayers will need to pay tax on the same. Those in the 30 per cent tax bracket will pay more taxes, as earlier they used to pay no tax on dividend income up to Rs 10 lakh," says Kuldip Kumar, leader, personal tax, PwC India.Should you stick to the dividend option in mutual funds? "Individual with incomes below the basic threshold of Rs 5 lakh should opt for the dividend distribution option," says Jayant Vidwans, director, Allstages Financial Solutions. He adds that those with taxable income should change their mutual fund scheme options to growth. *Short-term capital gains tax, ^ Long-term capital gains tax above Rs 1 lakh Tax rates *^# Remain unchanged under Budget 2020 proposals Additional surcharge (12%) and cess (4%) applicable on the dividend distribution tax amount **Additional cess and surcharge applicable as per income level Change your salary structureIf your company has been offering you its shares, request a rejig of your salary structure such that you get income in hand instead of more shares. This is critical as the dividend would be taxed-at a steep 43-plus per cent for top-rung earners.Tax deducted at sourceIf a mutual fund pays out dividend of over Rs 5,000 in a year, it would deduct 10 per cent of the amount as TDS (tax deducted at source). To avoid hefty TDS cuts, an investor will have to opt for different folio numbers in their fund investments. This will make keeping track of your fund investments more complex.Published By: Mukesh RawatPublished On: Feb 21, 2020--- ENDS ---

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Taking stock of your MF investments

Dividends will now be taxed in the hands of individuals. Here is how this affects you

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