Dividend options of debt funds are still attractive for investors falling in the highest tax slab of 30%.
The hike in dividend distribution tax (DDT) in debt funds for retail investors from 12.5% to 25% (plus surcharge and cess) proposed in the Budget FY2014 gets effective from today. For retail investors, the DDT on liquid and money market funds is already 25%. Now, all debt funds will have a uniform DDT of 25%. The surcharge on DDT too has been increased from 5% to 10%.
Accounting for the hike in surcharge, the DDT on liquid funds will now be 28.32% for retail investors. For corporates, the DDT will be 33.99% in liquid and debt funds.
So, how does it affect your clients? Since the DDT is 25% now, the post-tax return will be less.
However, investors who fall in the highest tax slab of 30% can still opt for dividend option since they have to pay 28.32% in debt funds compared to 30.9% in bank fixed deposits. If your investors’ time horizon is more than a year you can advise them to invest in growth options of debt funds as they can benefit by paying a less tax of 10% without indexation or 20% with indexation; (plus education cess). Short term capital gains are taxed as per the investor’s taxable slab.
An alternative
is to opt for SWP if your clients need a regular income. SWPs are more tax
efficient as compared to bank fixed deposits. Investors belonging to the
highest tax slab will have to pay 10.3% on the SWP income compared to 30.9% in
bank fixed deposits. To avail this benefit, investors have to opt for SWP after
a year.
Fund houses pay DDT on the distributed income but dividends are tax free in the hands of investors.
