Budget proposals to abolish dividend distribution tax (DDT) and make dividend income taxable in the hands of individuals will benefit debt fund investors who are in the lower tax bracket, analysts said. The move could also lead to a churn in the mutual fund industry with investors likely moving from dividend plans to growth plans of equity mutual funds.
While the Budget also proposed a 10 per cent tax would be deducted at source for ‘income’ above Rs 5,000 in a year, there is a lack of clarity on whether the levy would be only on dividend income or overall equity returns.
According to SR Patnaik, partner & head—taxation at Cyril Amarchand Mangaldas, for the amount investors get as dividend, they will be required to pay tax depending on the tax bracket. “If the amount of dividend is less than Rs 5,000, mutual fund will not withhold anything but if it’s more than Rs 5,000 they will withhold 10 per cent ,” he said.
For example, if an investor gets a dividend of Rs 10,000 in a year, Rs 9,000 (10 per cent of Rs 10,000) will be credited to their bank account and they will be able to claim credit of Rs 1,000 for the tax withheld by the MF while filing their tax returns. MF players feel this could also increase their compliance cost going forward. “With this announcement, dividend plans of MFs will get less attractive than growth plans. For example, if we look at equity funds, investors will get more benefits staying in growth plan rather than opting for dividend plans,” a leading fund house’s CEO said. —FE
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