Old Way or New Way….

–  By Nikhil Shah

 

Each change in our surrounding is a turning page. It is about closing one chapter and opening another one. Changes brings new beginning and excitement to life.
Similarly there has been one change in tax structure after Budget 2018 for investors. Which is 10% tax on all Equity Funds.

All Equity Funds has 2 options Growth and Dividend. Below is new tax implications on both options.

Dividend – Option.
Dividend Distribution Tax – 10 %  deducted at AMC level (Mutual Fund Level ) however it is tax-free in the hands of investors .

Growth – Option.
Short term Capital Gain – Applicable in case of below 1 year which is 15%.
Long term Capital Gain – Above 1 year upto 1 lakh nil, above 1 lakh 10%

** On above surcharge and STT as applicable

There are many Investors who like to reap out regular benefits through Dividend income OLD WAY in mutual funds.
Which is now taxed @ 10% at source. Solution to this is SWP – Systematic Withdrawal Plan NEW WAY. But below are few common misconceptions between Dividend and SWP.

However if similar investors takes route of SWP (Systematic Withdrawal Plan) in Growth option of Equity Funds.

He can jot down broadly below pro’s and con’s in Growth – SWP and Dividend – Payout.

SWP – Growth Option

  • Investor own can fix date and frequency on which he requires money.
  • Investor own can fix amt or yield which he want.
  • It can be paused and restarted in between if required.
  • There is capital gain tax if in any case, which will be very minuscule over DDT.

Dividend Option – Payout.

  • Dividend date and frequency is on the discretion of fund house. Can’t be decided by investor.
  • Dividend amount or yield is also on the discretion of fund house. Investor can’t decide amt.
  • Tax on dividend paid is deducted by Fund house before it’s been paid.
  • Dividend can be paid only after profit booking by fund house.

However essence of all this is, how it could be wise for investors to shift from Dividend – Payout to Growth – SWP.
Let’s understand this practically with example .

Assume an Individual invested in any Equity Balanced Fund 10 lakhs each in both options Dividend and Growth. He got fixed Monthly payout through Dividend payout in Dividend option, similarly he fixed same Monthly payout through SWP Payout in Growth option. Same monthly payout from both investments, yet there is difference in returns as below calculation.

Investment Amt: 10,00,000/= in each option.
Assume Fund delivered return : 12% compounded annual.
Monthly SWP or Dividend Amt :  7,500/= 
Period of Investment: 5 Years

SWP : Dividend

Note:

  • Above calculation is assumption based for understanding only. Calculation vary’s case to case basis.
  • In all Mutual Funds Dividend distribution tax is reduced from NAV, i.e., you are indirectly paying the tax.  
  • When withdrawal extends more than 1 year in Equity MF SWP, gain converts to long-term capital gain which is tax-free upto 1 lakh, however above 1 lakh gain due to long term capital gain taxation above calculation will get change.
  • In SWP, every time you redeem, only a part of the redemption is your gain. And only the gain component is taxed as opposed to the entire dividend amount being taxed under the dividend option. Hence the tax is lower in systematic withdrawals than in dividends in short and long term both case.

Now you decide OLD WAY or  NEW WAY…..

HAPPY INVESTING.