Dividend From Mutual Funds
Personally, I began my investment jouney by investing in Mutual Funds. I still many at times choose the Dividend option instead of Growth option. One reason, it serves as a reminder and helps me keep a track on my investment. Second, I never had to bother on the tax impact from this income. I know many senior citizens including my own father who have opted for Dividend payout while investing in Mutual Funds so as to receive a steady cashflow every year. So, whatever the reason, I am sure many of us are sailing in the same boat.
Post Budget 2020, there have been many changes with respect to the tax treatment on investments in Mutual Funds. One important change is with respect to the treatment of Dividend Income. Previously, Dividend Distribution Tax (DDT) was levied on Mutual Fund Companies. They used to deduct the same before paying the investors. However, now the same has been removed. So, Dividend will get taxed in the hands of the receipient.
As I said, the Mutual Fund Companies deducted the applicable DDT rate before paying the dividend. The DDT rate for Equity Mutual Funds was 11.65%. The DDT rate for Debt Mutual Funds was 29.12%.
Income Tax Slab Rates
So, going forward, the receipient of Dividend Income shall disclose Dividend received as part of his total income and pay tax based on his slab rate. In case of Resident Individuals, depending on which slab they fall into, the tax rate can vary from NIL to a whopping 42.74%. The various tax slabs and rates is available on the Income Tax website. Please click on the below link for the same.
Tax Deducted At Source (TDS)
TDS shall be deducted before remittance of Dividend by the Mutual Fund Company in case the distribution amount exceeds Rs. 5000. TDS shall be deducted at the rate of 7.5% in case of Resident Individuals, HUF and Domestic Companies. The proposed TDS rate was 10% initially. However, later it was reduced to 7.5% for the period 14 May 2020 to 31 March 2021.
The proposed tax changes are a mixed bag. Depending on your individual tax slab, it may prove to be beneficial or you may end up paying more. So, estimate your total income for the year and determine your tax slab. This will give you an idea of your tax liability on your Dividend from Mutual Funds. This will then help you decide whether to opt for Dividend Payout or to go in for Growth Option.
Stay tuned for further updates and we shall understand the Capital Gain Taxation applicable to various Mutual Fund Schemes.