Dividend options in mutual funds may find few takers now that TDS of 10% will be deducted on dividend income. This coupled with removal of DDT that has shifted the burden of paying tax on dividends from companies and fund houses to investors has made dividend option for investors less attractive.
Experts believe that TDS on dividend income would have adverse impact on the dividend option.
Suresh Sadgopan, founder of Ladder7 Financial Advisories said that TDS on dividend income has tilted the scale against dividend option of MF schemes.
Another adverse impact could be on hybrid funds. The already battered hybrid fund category is likely to be impacted adversely due to TDS on mutual funds dividend income. Hybrid schemes were aggressively pitched as a fund category that would deliver steady income through dividends, observe experts.
One interesting outcome of this move would be the increase in popularity of growth option. Mumbai IFA Sadashiv Phene feels that TDS on dividend income will encourage investors to choose the growth plan. At the end of the day, this is beneficial for investors, he said.
He feels that investors who want regular earning from mutual funds can anyway opt for the Systematic Withdrawal Plans (SWPs). The dividend option was always less efficient because of higher tax for investors who fall under the 10% and 20% bracket and many people tend to spend the dividends unwisely, he added.
Meanwhile, the industry also cheered the clarification that TDS will not apply to capital gains from mutual funds.
DP Singh says that it is a big relief for the MF industry that TDS will be levied only on dividend income.
IFA Sadashive Phene said, “TDS sounds like ‘trouble’ to investors. Not being subjected to TDS have been among the selling points for MF schemes. If proposals in Budget 2020 comes into effect, we have to revisit the way we pitch mutual funds.”
