Budget 2020 has removed dividend distribution tax (DDT) and made dividends taxable in the hands of investors. Also, it has introduced tax deduction at source (TDS) at 10 percent if the dividend declared by mutual funds exceeds ₹5,000 in a year.
Presently, mutual funds deduct DDT first and then hand over the dividend to unit-holders.
From April 2020, the dividend amount will be added to the taxable income of the investor and taxed as per his/her tax bracket.
Currently, when mutual funds declare dividends, they pay tax at the rate of 10 percent and 25 percent on equity and non-equity schemes, respectively, and pay only the balance to investors.
In addition to the above tax rates, there is a surcharge (at 12 percent of tax) and cess (at 4 percent of tax plus surcharge). So, for retail investors, the effective DDT on equity funds works out to 11.65 percent, and on non-equity funds 29.12 percent.
There are two options in dividend plans — payout and reinvestment. In the dividend payout option, the dividend declared is paid out to investors. In dividend reinvestment, the dividend declared is not paid out but used to purchase additional units in the scheme.
Whether paid out or reinvested (also in liquid exchange-traded funds (ETFs)), dividends are subject to DDT presently but will be taxed in the hands of the investor from April 2020.
Given the changes in the taxation of dividends, who gains and who loses? Also, which plan —- dividend or growth — will be suitable for retail investors? We look at the options under both the old tax regime (with higher tax rates) and the optional new tax regime (with lower tax rates).
Old tax regime
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