What can go wrong in the case of Mutual Fund Dividend Plans?

What can go wrong in the case of Mutual Fund Dividend Plans?

If we talk about taxation structure investment, then we need to understand that the scrapping of the Dividend Distribution Tax or DDT was due for quite some time now. The same has been the case with the shifting of equity and equity mutual funds dividends to the taxable income of the investor. In the case of DDT, the company or the mutual fund paying the dividends take action and deducts the tax, that too at a fixed rate. This constant rate is applicable to top everyone. This has severe consequences on the retirees and small investors. They end up paying the same amount of tax which businesses and rich individuals pay. But these rich people get much higher income in the form of higher dividends. So, this is a clear loss for small investors.

According to the new arrangement that will come into action from 1st April onwards, the payer will not deduct any tax. However, there will be a TDS deduction. But this TDS will be refundable if it is higher than your taxability. As a result, the dividends add up to the income of the taxpayer. The taxes are according to the tax bracket under which the taxpayer comes.

But this alteration in the system has annoyed some equity mutual fund investors. They generally make heavy investments in dividend plans. They also come under higher tax brackets. Until now, these equity mutual fund investors had been paying DDT at just 10% plus a surcharge. But the new situation compels those in the higher tax slabs to pay a higher amount of tax on the dividends. But this is absolutely wrong.

It is not at all advisable to invest in dividend plans of mutual funds. There is no use of complaining about taxes. Instead, one should redeem his investments from the dividend plans. He or she should shift these investments to non-dividend plans.

If we look at the definition of “dividend,” then it means “distribution of a portion of a company’s earning.” This means, when a company makes a profit, it will invest some part of it in the business and distribute the remaining amount among the shareholders in the form of dividends. The management of the company will definitely have a say in the matter. A lot of companies are there, which do not share profits in the form of dividends at all.

In the case of mutual funds, the entire profit belongs to the investors. There is no difference whether you are getting the money in the form of withdrawal or dividends. Only the effect of taxation will vary. If, suppose, you invest an amount of Rs 1 lakh in the mutual fund dividend plan, you will end up getting Rs 5000 as the dividend. Then the worth of your investment will reduce and boil down to Rs 95,000. Hence, it is just like the withdrawal of your money.

You should decide whether to invest in mutual funds dividend plan or a growth plan on the basis of taxation. It would have been better if you had joined the growth plan before the budget. If you require a regular source of income from the mutual fund investments, then simply withdraw the amount that you need regularly. This will reduce the amount of your tax. This reduction happens because the withdrawals will be subject to capital gains tax.

Even after the modifications in the Budget 2020, if you are still choosing the dividend plans, then you will definitely end up paying much more tax than you actually need to. Please avoid doing this at any cost.