Budget 2020 Expectations for MF: Read on to know the existing taxation structure for dividends from equity mutual fund, and will dividend distribution tax be scrapped?
Union Budget 2020 Expectations for Mutual Fund: Investors are looking forward to the FM for making investments in equity mutual funds less taxing. Even while there exists a long-term capital gains tax (LTCG) on equity-oriented investments, even the dividends do not have a tax-friendly taxation structure. In both equity and non-equity i.e. debt MF schemes, the dividend declared by the MF schemes is subject to tax, although at the end of the fund house. The equity mutual fund dividend tax treatment remains a crucial concern for the investors.
For both equity and debt MF schemes, the dividend received is tax-free in the hands of the investor and the choice should ideally be dependent on the need of the investor, the taxation of dividends spoils the party for the investor. The tax is not on the investor to pay but on the fund house. It is called dividend distribution tax (DDT) and is to be deducted before distributing dividend to the investor.
The Association of Mutual Funds in India (AMFI) in its list of suggestions to the government has stated that “ It results in mutual fund unit holders being subject to double taxation because of the cascading effect of DDT – first when the mutual fund schemes receive the dividends from the companies, net of DDT, and again when the mutual funds pay dividend, net of DDT.”
In its proposal, the AMFI has requested the government to abolish the DDT on dividend paid under equity-oriented mutual fund schemes. This they feel will also help to have a level playing field and uniformity in the taxation of investment in MF schemes and ULIPs of Insurance companies.
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For an equity mutual fund investor, there are three options to choose – Growth, Dividend or Dividend Reinvestment plan. When the fund house declares a dividend in an MF scheme, the same is paid to the investor into the bank account. Under the Dividend Reinvestment Plan, the dividend amount as per the units held by an investor is put back into the same scheme, while in the growth plan, no dividend is declared and the growth in the NAV stays within the scheme.
Dividend Distribution Tax calculation
For the equity MF schemes, the DDT is 10 per cent plus Surcharge and Cess.
DDT in equity MF schemes = 10% + Surcharge + Cess
= 10% + 12% + 4%
= 11.648 per cent
DDT in debt MF schemes = 25% + Surcharge + Cess
= 25% + 12% + 4%
= 29.12 per cent
The dividend is declared by the fund house based on the face value of each unit of the MF scheme. Once the dividend is declared, the NAV of the scheme falls by an equal amount. In other words, the NAV gets reduced by the amount of dividend declared. As an investor, there is no further tax liability and the dividend amount is tax-exempt in the hands of the investor in the year of receipt.
DDT was first introduced on equity MF schemes in Budget 2018. The long term capital gains tax (LTCG) applies on gains above Rs 1 lakh in a financial year made from equity assets including equity MF schemes but DDT applies to all equity MF that declares a dividend to its unitholders.
For the growth plan unitholders, there is no implication or impact of DDT. Ideally, investors looking to save funds for the long term should stick to Growth option. However, there are other investors such as senior citizens who need a regular inflow of funds in the form of dividends. Opting for dividends is taxing as of now. It remains to be seen what steps the FM takes in the forthcoming Budget 2020 on February 1 and will dividend distribution tax be scrapped.