While everyone has been talking about tax on Long Term Capital Gains (LTCG) when it comes to stocks or equity oriented mutual funds, one other factor that investors need to consider is the Dividend Distribution Tax (DDT). This is a tax applicable when someone chooses the Dividend option instead of the Growth option, while investing in an equity mutual fund. DDT is applicable on the Dividend Payout as well as the Dividend Reinvestment option.
Prior to the 2018 Union Budget, there was no DDT on distributions in the Dividend options of equity-oriented mutual funds (which invested at least 65% of their assets in equities).
The new reality – As of April 01, 2018, there will be a 10% tax (plus surcharge and health and education cess) on income distributed by equity-oriented mutual funds. The mutual fund house will deduct the tax plus cess and then make the distributions to the investor; hence, there will be no tax payable in the hands of the investor. Even though DDT is paid by the mutual funds and not by investors, investors would be impacted as the fund will deduct the tax out of the declared dividends and the pay out to the investor will be reduced to such extent
Here are a couple of ways how the Growth option plus a SWP could help you:
If regular income is required by an investor
Then consider investing in the Growth option of an equity-oriented mutual fund or switch from a Dividend Payout option to a Growth option. We recommend waiting for one year before starting the SWP, so that LTCG tax of 10% will be applicable and the one lakh tax shield can be utilized, resulting in a lower effective tax rate.
Should income be required in the first year, the capital withdrawn through the SWP (Sysmatic Withdrawal Plan ) in the first year will be subject to short term capital gains tax of 15% followed by a 10% LTCG tax, for the life of the investment. The `1 lakh tax shield will also be applicable on LTCG after the first year resulting in a lower effective tax rate.
The rates are applicable for financial year 2018 -19 subject to enactment of Finance Bill 2018. In this material we have used information that is publicly available. Information gathered and used in this material is believed to be from reliable sources. The Authr however does not warrant the accuracy, reasonableness and/or completeness of any information. The data/ statistics are given to explain general market trends in the securities market; it should not be construed as any research report / research recommendation. We have included statements /opinions / recommendations in this document, which contain words, or phrases such as ”will”, ”expect”, ”should”, ”believe” and similar expressions or variations of such expressions that are ”forward looking statements”. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. All figures and other data given in this document are dated and the same may or may not be relevant in future.