Dividend payout option in debt mutual funds may lose sheen.
Union Budget 2015 has proposed to hike the dividend distribution tax in debt funds by 40 bps to 28.75%.
In the Budget document, Union Finance Minister Arun Jaitley has proposed to increase the surcharge by 2% from 10% to 12% on additional income-tax payable by fund houses on distribution of dividend. Debt funds currently pay DDT of 25%+ 10% surcharge + 3% cess or 28.325% on gross basis when they distribute income to resident individuals. Now, after factoring in the hike in surcharge, DDT will increase to 28.75%.
“It doesn’t make sense to opt for dividend payout option for individuals irrespective of their tax bracket. Investors should simply go with growth option. Firstly, they will have indexation benefit if they remain invested for over three years. Also, they will be taxed on marginal rate of taxation in case of redemption within three years, just like bank deposit,” said D P Singh, CMO-Domestic Markets, SBI Mutual Fund.
Last year, Finance Minister had revised the computation method of DDT on gross basis which had increased the actual DDT payout by almost 5%. With the proposed revision in DDT, the dividend payout option in debt mutual funds has certainly become less attractive.
Suresh Sadagopan of Ladder7 Wealth Advisories seconds the view “There is no point of opting for dividend payout option for an individual falling under 10% or 20% tax bracket. Similarly, it may not make much difference for individual falling under 30% tax bracket. It’s better to stick with growth option.”
