hen it comes to investments in debt-oriented mutual funds, investors often find it difficult to choose between growth and dividend options due to lack of knowledge of tax applicability. Few investors even avoid the hassle of contemplating between the two options, which sometimes impact them negatively. While others find no difference between the two schemes, which is also not true. Therefore, it is important to understand the difference between the two options when investing in a debt-oriented fund.
Capital Gains - Unlike their equity counterparts, the debt-based mutual funds need to be held for three years to be considered as a long-term capital asset. This means that sale of these mutual fund units before the expiry of three years will attract short-term capital gains, which are taxed as per the applicable tax slab of the investors. Thus, an investor falling in 30% tax bracket will have to pay a higher tax on the short-term capital gains.
When in 30% income tax bracket - If an investor falls in the highest tax bracket than choosing dividend reinvestment option over growth will provide marginal relief in terms of tax outgo. It is to be noted that the dividend is reinvested after a dividend distribution tax at the rate of 28.33% is paid. Thus, there will be a little scope of tax saving if dividend reinvestment option is selected over growth option by such an investor.
