Growth Fund vs Dividend plans: Which Mutual Fund would be better after DDT abolition?

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Updated: February 3, 2020 7:05:44 AM

Budget 2020 India: While the Budget proposed a 10% tax would be deducted at source for ‘income’ above Rs 5,000 in a year, there is a lack of clarity on whether the levy would be only on dividend income or overall equity returns.

Budget 2020 India, Budget 2020-21Union Budget 2020 India: While in the proposed structure dividends will be taxed according to their tax slabs, if they opt for growth equity schemes, they have to pay long-term capital gains of just 10%.

Budget 2020 India: Budget proposals to abolish dividend distribution tax (DDT) and make dividend income taxable in the hands of individuals will benefit debt fund investors who are in the lower tax bracket, analysts said. The move could also lead to a churn in the mutual fund industry with investors likely moving from dividend plans to growth plans of equity mutual funds.

While the Budget also proposed a 10% tax would be deducted at source for ‘income’ above Rs 5,000 in a year, there is a lack of clarity on whether the levy would be only on dividend income or overall equity returns.

According to the SR Patnaik, partner & head – taxation at Cyril Amarchand Mangaldas, for the amount investors get as dividend, they will be required to pay tax depending on the tax bracket. “If the amount of dividend is less than Rs 5,000, mutual fund will not withhold anything but if it’s more than Rs 5,000 they will withhold 10%,” he said.

For example, if an investor gets a dividend of Rs 10,000 in a year, Rs 9,000 (10% of Rs 10,000) will be credited to their bank account and they will be able to claim credit of Rs 1,000 for the tax withheld by the MF while filing their tax returns. MF players feel this could also increase their compliance cost going forward.

“With this announcement, dividend plans of MFs will get less attractive than growth plans. For example, if we look at equity funds, investors will get more benefits staying in growth plan rather than opting for dividend plans,” a leading fund house’s CEO said.

While in the proposed structure dividends will be taxed according to their tax slabs, if they opt for growth equity schemes, they have to pay long-term capital gains of just 10%. So, investors in the higher tax bracket of 20% or 30% will get more benefits of staying invested in growth plans. Earlier, DDT for equity-oriented funds was 11.64% (which includes surcharge and cess).

DDT for distribution of income by debt fund was 25% for individuals and Hindu undivided family (HUF) and 30% for others. After grossing up and including surcharge and cess, this comes to 38.33% and 49.92%, respectively. While the rate of DDT by companies in India is 15%, which after grossing up, comes to 17.65% and taking the impact of surcharge at 12% and cess at 4%, this comes to 20.56%.

Market participants say TDS of 10% for dividend above Rs 5,000 in year is too low and should be around Rs 50,000. “There were people who were investing in dividend plans to get regular income, but now it will be better for them to opt for systematic withdrawal plans (SWPs),” Union Asset Management Company CEO G Pradeepkumar said.

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SWP allows investors to withdraw a certain amount of money at a regular interval from their lump sum investment.

Apart from mutual funds, companies in India also pay DDT of 20.56% on dividends declared by them and shareholders are not subject to any tax. “Going forward, the shareholders will have to pay tax according to their tax slabs. Shareholders who are in the lower tax bracket of ‘nil’ or 10% will stand to benefit under the new regime, said Himanshu Parekh, partner and head, corporate and international tax, KPMG in India. In addition, a resident (other than company) was required to pay tax at 10% plus applicable surcharge and cess if the dividend income in a year exceed Rs 10 lakh.

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

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