Apart from balanced funds, the tax on dividend will also affect arbitrage funds, which had already started generating lower income.
MUMBAI: The introduction of a 10% tax on income distributed by equity funds will pinch investors used to earning tax-free dividend. However, systematic withdrawal plans may be a suitable alternative.
Many fund houses had pushed the dividend option of equity-oriented balanced funds to investors as a safe way of earning assured monthly income.
This nudge to rely on dividend income put investors on the wrong path, experts said. The worry was that such dividend payments would be unsustainable if market conditions soured, leaving investors in a tight spot. However, with the introduction of the tax, funds are unlikely to resort to such gimmicks anymore.
“This will put an end to the blatant mis-selling as these products were not being sold for the purpose for which they were created,” said Vidya Bala, head of mutual fund research at FundsIndia. Apart from balanced funds, the tax on dividend will also affect arbitrage funds, which had already started generating lower income.
Experts said the systematic withdrawal plan (SWP) route now becomes more relevant for earning regular income from equity funds.
Initiating an SWP after a year of purchasing the fund will allow investors to earn a guaranteed monthly income.
Besides, a small investor may be able to avoid tax altogether if the long-term capital gains accrued on the amount withdrawn under SWP is less than the Rs 1 lakh threshold.
“SWP is a superior option than dividend, even without the tax levy on the latter,” said Swarup Mohanty, CEO of Mirae Asset Global Investments (India).
