Those investing in mutual funds for monthly dividends, should now consider systematic withdrawal plans (SWP), which presents a more tax efficient option after the recent move to tax dividends. The finance minister in his budget speech announced a 10% tax on income distributed to unit holders by equity oriented schemes. In order to provide investors a tax-efficient option, SBI Mutual Fund has introduced the ‘Bandhan SWP’ option for its mutual fund schemes, which enables an investor to remit cash at monthly intervals to immediate family members. DP Singh, ED and CMO at SBI Mutual Fund said, “After the recent announcements, we feel that, SWP is the most tax efficient solutions for individuals in the current tax regime.” SBI Mutual Fund has also allowed existing investors, who have their investments under dividend payout and dividend reinvestment option, to avail of this facility by switching their investments to the growth option.
The minimum withdrawal amount is Rs 5,000 per month for the period of 12 months. This is a facility offered to both new and existing SBI Mutual Fund investors. It allows for withdrawal of a specified sum of money on a periodic basis, from the investment in a growth option of an open-ended mutual fund scheme. Participants in the mutual fund industry say that the announcement of dividend tax at 10% will hit the investors who are investing in dividend option of equity funds and curtail ‘mis-selling’. In the past few years, several fund houses were aggressively pushing dividend option of balanced funds (they are also considered as equity oriented funds) to investors as an easy way to earn monthly income.
Earlier, both growth and dividend options of equity schemes benefited from zero taxation. But with the proposal in the budget, under the dividend option any dividend payouts by schemes will be taxed at 10%. This makes the growth option more desirable for investors, mutual fund players said. While the amount of dividend paid out and the frequency of such payments are often based on the decision of fund houses, under the SWP option, investors will continue to get a fixed amount remitted at specified intervals.
Pankaj Mathpal, founder and managing director at Optima Money Managers says, “I think for long term investors it makes sense to go for the growth option in equity funds rather than the dividend option. If they want some liquidity they can choose SWP as it is more tax efficient.” He also added that, with 10% tax on income distributed by equity oriented mutual funds, investors should now not look at dividend re-investment option as it will lead to lower returns. Senior officials in the industry say that, going forward mutual fund houses are likely to publicise SWP as it is more beneficial for investors.