To get some regular monthly income in hand, Rita (name changed), a housewife, used to accumulate whatever money she gets to invest in the dividend payout option of a equity-oriented balanced fund, offered by a leading Asset Management Company (AMC) having repute of providing consistent monthly dividend for many years.
Initially, she was very happy with over 10 per cent annual dividend payable monthly as there was no Dividend Distribution Tax (DDT) on dividend distributed by equity MFs.
However, she had got jittery last year after dual blow of imposition of 10 per cent DDT on dividend distributed by equity funds that reduced her monthly in hand dividend and then loss of units after the fund in which she originally made the investments was merged with another fund of same category following the consolidation order of the Securities and Exchange Board of India (SEBI) to reduce the number of funds.
As a result, she got further scared after Finance Minister Nirmala Sitharaman in Union Budget 2020 declared that the dividend income will no longer be tax free, but DDT will be abolished.
Currently, companies cut 15 per cent DDT (excluding surcharge and cess) while distributing dividend to the shareholders, including MFs. While distributing dividend to unit holders, MFs again charge 10 per cent DDT.
As a result, the MF investors ultimately bear double DDT on the dividend they get. So, abolition of DDT would help avoid this double taxation.
In case of debt MFs, the rate of DDT is 25 per cent (excluding surcharge and cess), which is deducted at the time of distributing dividends to the unit holders.
From the financial year (FY) 2020-21, no DDT will be cut, while distributing dividends, but dividend will be taxable in the hands of the investors. As a result, dividend distributed over Rs 5,000 will be subject to 10 per cent tax deducted at source (TDS).
Depending on the tax bracket in which an investor falls, he/she either has to pay more tax (for people in higher than 10 per cent tax brackets), or may get the TDS amount back (for people in less than 10 per cent tax brackets).
As Rita doesn’t have any other income and her annual dividend income is less than Rs 2 lakh, she doesn’t have to worry, as her in hand dividend amount will be more after abolition of DDT, but she doesn’t have to pay any tax.
So, after DDT is abolished, MF investors would get higher dividend in hand (provided MFs pass on the DDT relief they get), but the tax outgo on dividend income will depend on in which tax brackets they fall.