‘Investors should switch to growth options of MFs to avoid tax blow’

Financial Planners are advising investors with taxable income to consider switching from dividend options in equity-oriented mutual funds to growth.

The advice comes after the budget put the onus on investors to pay tax on dividend income, based on their tax slabs, starting April. Also, any dividend above ₹5,000 in a financial year will attract tax deduction at source (TDS).

“Investors whose income is subject to tax should move to the growth option. Those who need a monthly income can opt for the systematic withdrawal plan,” said Amol Joshi, founder, Plan Rupee Investments. Joshi, however, said that while moving from dividend to growth, investors should factor in the implication of exit loads and taxation.


Another advantage for investors in the growth option is that if they choose to sell their mutual funds after a year, annual long term capital gains up to ₹1 lakh are exempt.

Financial planners said that for those needing a monthly income, systematic withdrawal plan (SWP) works better than dividend as investors can decide the amount they wish to withdraw every month. By contrast, the dividend amount paid is controlled by the fund house.

According to data from Morningstar India, as of December 2019, ₹3.09 lakh crore of assets of the mutual fund industry of a total of ₹23.29 lakh crore have been invested in dividend plans. However, the quantum is higher in the hybrid fund category with a total of ₹1.31 lakh crore of ₹3.74 lakh crore or 35 per cent of the assets in the dividend plan.

“Senior citizens or investors whose income is not subject to tax could continue to remain in the dividend plans,” said Kaustubh Belapurkar, director (fund research), Morningstar India. They must note that TDS deduction is applicable for dividend paid in excess of ₹5,000 a year, for which they will have to ask for a refund, if income is not subject to tax.

Many investors had opted for the dividend option in hybrid funds, especially in the equity and debt category (balanced funds), where they earned dividends as high as 1 per cent monthly, or 12 per cent a year. The budget proposed scrapping dividend distribution tax that used to be paid by companies. Earlier, a MF scheme had to pay DDT after which the payout was made to its unit-holders.