The 2020-21 Budget eliminates the dividend distribution tax (DDT) that funds must deduct before distributing dividends to investors.
Instead, from 1 April 2020, dividends will be taxed to the investor at the relevant income tax rate.
What does this mean for mutual fund investors?
Before and After Budget – What Has Changed for Equity Scheme Investors:
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growth plan
- Nothing has changed for companies investing in their growth plans.
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Dividend schedule
- Previously, dividends were tax-free for investors. However, he deducts his DDT of 11.65% before the fund distributes dividends.
- Now that DDT has been removed, investors will pay tax on dividends based on their income tax rate.
- This means a lower dividend tax burden than before for 5% and 10% slab rates (under the new income tax regime).
- This means a higher dividend tax burden for those belonging to the 15% or higher income tax slab.
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our recommendation
- For long-term investment products such as equity-oriented mutual funds, we have always prioritized growth over dividend options. (If equity exposure is 60% or more).
- Budget tax tweaks have made dividend options inefficient, even from a tax perspective (Except those with lower tax rates).
Before and After Budget – Changes for Debt Fund Investors:
-
growth plan
- Nothing has changed for companies investing in their growth plans.
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our recommendation
- Dividend plan investors (other than those in the 30% bracket) have a relatively lower tax burden, but we do not recommend dividend options.
- Investors who require regular payments can instead take advantage of the much more tax efficient SWP (Systematic Withdrawal Plan). In a dividend plan, the entire dividend amount is taxable. However, under SWP, only capital gains are taxed. In other words, the tax is the number of units sold multiplied by the difference between the NAV at which the unit was sold and the NAV at which it was purchased.
- let’s take exampleSuppose you fall under the 30% tax rate. You invest his 100,000 rupees in a debt scheme (dividend plan). If your NAV is ₹10, you will be allocated 1 million units. Now let’s say the NAV per unit is ₹11 per year.
If the fund declares a dividend of ₹1 per unit, you will receive ₹100,000 in dividends. You have to pay 30% tax on this, which is 30,000 rupees.
If instead you opt for the equivalent SWP of INR 1 million, your tax liability will be lower. You will pay 31.2% tax (30% slab rate and 4% cess tax). capital gains only.
For SWP, you need to sell 9091 units at 11 NAV. The unit sold has a capital gain of INR 9,091. That is 9,091 units multiplied by (₹11 minus ₹10).
In this case, you will pay 31.2% tax, which is only ₹2,836. This is much less than his 30,000 rupee tax payable on dividends.
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