Post-Budget, growth option becomes more attractive for MF investors

Unlike MF investors, those betting on direct equities may feel the pinch because dividend payout is not under their control

Mutual fund investors, who have selected the growth option, can finally heave a sigh of relief after the Union Budget.

With Finance Minister Nirmala Sitharaman deciding to move the tax incidence of dividend distribution tax (DDT) from companies to individuals, the liability for this category of investors would fall dramatically.

But how? Even if they redeem their mutual fund units after a year or so, they will only pay a long-term capital gains tax of 10 per cent for over Rs 1 lakh.

Whereas, if they had taken the dividend option, the tax rate would be according to their income tax slab. 

Nand Kishore, Partner, DSK Legal, says, “DDT has been abolished. Instead, the dividend paid by companies will be taxed in the hands of the individual shareholder.”

Suresh Sadagopan, director, Ladder7 Financial Advisors, says, “Before this, as far as equity mutual funds or direct equities were concerned, there was no tax up to Rs 10 lakh dividend. Beyond Rs 10 lakh, there was a tax of 10 per cent.” 

However, before you received the dividend, there was a hefty DDT of 15 per cent plus a surcharge.

So what does this means to the common man: Kishore says: “If the individual is already in the 30 per cent bracket, this would have an adverse impact.” That’s not all; there’s a good possibility that this will push many taxpayers into a different tax bracket.”

What should you do in such a case? Vishal Dhawan, a certified financial planner, says, “Suppose an investor’s income for the year is such that receiving dividend will push him into a higher tax slab. The investor may not want a dividend that year. On the other hand, he may be more receptive to receiving dividend in a year when his income is lower (and hence he will fall in a lower slab that year).”

In such a situation, a mutual fund investor is better placed than an equity holder. This is because in the latter case, he has no control over whether he can receive the dividend or not (the company will pay it anyway). 

In mutual funds, the investor can control whether he wants dividend from a fund by shifting from the growth to dividend option.

He can also decide when he wants it and when he doesn’t. Thus, in mutual funds, the investor enjoys greater control than in the case of shares (direct equities). 

Adds Mrin Agarwal, chief executive officer (CEO) of Finsafe: “Move to growth option. And, those seeking monthly income can take the systematic withdrawal plan (SWP) route.”

Dhawan says that the arbitrage in mutual funds gets created between the dividend plan and the SWP option in the growth plan. 

In the dividend option, the investor gets taxed at the marginal income tax rate. In SWP of a growth plan, he will be taxed depending on whether he is eligible for long-term or short-term capital gains. 

On long-term capital gains from equity mutual funds, he will pay 10 per cent tax only on gains above Rs 1 lakh. 

On short-term capital gains, he will be taxed at the 15 per cent rate. For investors in higher tax brackets, SWP from the growth option is likely to be a better bet in terms of tax payout.