Dividend income in for taxing times

Individual taxpayers may see a slight dent in their profits earned on investments in mutual funds or life insurers’ investment offering.

The Direct Taxes Code (DTC) Bill, which was tabled in Parliament today, proposes to impose a five per cent dividend distribution tax (DDT) on mutual fund houses and life insurers on income distributed by them.

“The mutual fund or the life insurer or the person responsible for making payment of the distributed income on its behalf, shall be liable to pay tax to the credit of the government within a period of fourteen days from the date of distribution or payment of such income, whichever is earlier,” said the DTC Bill.

This norm is applicable to mutual fund scheme and insurance policy that invest over 65 per cent of the total proceeds in equity shares, or equity-oriented mutual funds. Rest of the schemes and policies would be taxable on the income-tax rates.

So, if you have opted for the dividend option of a mutual fund scheme, you stand to earn slightly less once DTC comes into effect from April 2012. Currently, there is no DDT applicable to equity fund schemes or insurers on income distribution to unit/policy holders. Debt schemes pay 14.16 per cent for individuals on dividend distribution.

Gautam Mehra, executive director, PricewaterhouseCoopers says, “The only benefit is that receipts (bonus or death benefits) on insurance policies with premium less than 5 per cent of the sum assured would be exempted from tax.”

However, financial planners do not think this norm is a big deterrant for investors or policyholders. D Sundarajan of Trendy Investments says, “This move to tax dividend earnings is definitely negative. But will not have a very big impact on the investors.”

Experts say the dividend yield for most mutual fund schemes is in the range of 6-8 per cent. Say, your scheme earns a dividend of 8 per cent, after paying 5 per cent as DDT you will earn 7.50 per cent. Your dividend income will suffer a dent of 50 paise.

Dividend yield is calculated on the net asset value (NAV). When funds declare a dividend of 20-30 per cent, it is calculated on the face value of the scheme. For instance, Tata Pure Equity Fund declared a dividend of Rs 2 in July 9, 2010 on the face value of Rs 10 (dividend of 20 per cent).

But, the NAV of the scheme was Rs 37.60 on that day. So the dividend was 5.3 per cent.