No, this is not a poetry post, its very much about Investments. That too, its about very famous Dividend Option in Mutual funds. The Dividend Option in Mutual Funds have been largely used in the wrong context, especially to take money from FD investors assuring them Regular Dividend from MF and how they can benefit from tax angle too.
To put an end to it, there is a change in Dividend Taxation from this Financial Year (1st April 2020). The 2020-21 Budget has done away with the dividend distribution tax (DDT) that funds have to deduct before distributing dividends to investors. Instead, from 1 April 2020 dividends will be taxed in the hands of investors at their relevant income tax slab rates.
What does this mean for mutual fund investors?
If you are invested in funds with Equity Taxation, earlier the fund use to deduct 11.65% as Dividend Distribution Tax and distribute the rest. Under the new rule, there won’t be any DDT, rather the Dividend Recipient need to pay tax at their Tax slab.
If you are in 5% or 10% tax slab then the new rule is beneficial for you, but for others, you need to shell out higher amount as Dividend Tax.
If you invested in Debt Funds, dividends from these funds were anyways tax at @30% so it will be beneficial for all under 30% slab. But, it doesn’t mean that you should take this option, its better to be in Growth option even you come under lesser tax slab and use Systematic Withdrawal Option and get the benefit of exemption on Capital Gains. Will write more about the advantages of growth option another post, this one is exclusive for new Dividend Taxation rule.
What are the other details pertaining to this change?
1. Mutual funds will deduct a TDS of 10% (for resident Indians) & 20% for NRIs if your dividend is more than Rs. 5000 in a Financial Year, but how will they know about your other Dividend Yielding Investments so my assumption is they might deduct for all irrespective of the amount (will sure update when clarity emerges on this).
1 (A) Certain Mutual Funds have issued a circular that, they will deduct 10% TDS for Resident Indians and 20% for NRI irrespective of the Dividend amount. They claim that its not possible to track the Dividend Amount of investors individually. (FAQs of certain MF issued on 8th April, 2020)
2. What if you are in Dividend Reinvest option, there too there will be a TDS and the residual amount is invested back. Imagine the tedious process if you are in Daily or Weekly Reinvest option 🙁
3. Mutual Funds will give TDS certificate for tax filing purpose and technically it should appear in your 26AS statement too.
4. As in other TDS options, here too you can give exemption form like 15 H or G based on your eligibility.
So, if you are invested in Dividend option, please consult your adviser and take necessary action. If you have any doubts or need some clarifications on any above points, please feel free to write to me or call me.
Happy Investing
RaVi
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