Frequent switching of mutual fund scheme and plans are not advisable. Now the time has come to not only think of switching from dividend plan to Growth Plan but to act upon in a rush. Yes, abolishment of Dividend Distribution Tax in the Union Budget 2020 has made Growth Plans more attractive to conservative investors too. Let’s check it..
Dividend plan yesterday, today and tomorrow
Dividend plan of mutual funds have been the favourite of risk averse investors who want to derive regular income out of their investment. Mutual fund houses were also using dividends to lure the investors by announcing frequent dividends on various MF schemes. But is it still an attractive preposition? What has changed now?
Currently and till March 31, 2020, dividends from mutual fund schemes are and will be taxed in the hands of the mutual fund AMCs @ 10% and are tax free in the hands of the investors. With effect from April 1st 2020, dividends are to be taxed in the hands of the investor or receiver as per their Income Tax slab rates. Meaning, if you are in the 30% tax slab, then you will have to pay 30% tax on the dividends you receive.
What should you do if you have invested in dividend plan?
Well, you can switch to growth plans before March 31st, 2020 with an option of “Systematic Withdrawal Plan (SWP) for regular income. Systematic withdrawal plan (SWP) is an option to structure a withdrawal of certain amount each month. You can structure a SWP in such a way that you withdraw the gains and also redeem part of your investment separately. By opting this you will be paying the capital gains tax only on the part of the gains you withdraw above Rs.100,000 annually. Hence, SWP is a tax efficient option wherein you will be paying only 10% long term capital gain tax as against higher tax as per your slab rate if you are in higher tax bracket.
Let us take a live example and check the returns and tax outflow for a person in 30% tax bracket if dividends are to be taxed in the hands of the investor. For this purpose, let us take Axis Bluechip Fund. The fund has grown by 12.17% CAGR in last 10 years under growth plan and 9.79% under dividend plan (including dividend payout) before tax. If the dividends are to be taxed in the hands of the investor, then the post-tax returns would be 8.61% in case of dividend plan and 11.75% in case of growth plan. The calculation of returns is presented in the below image.
What about the investors who are in lower tax bracket @ 10%? Still it makes sense to switch to growth plan as the dividends paid above Rs.5000 attracts tax deduction at source @10% and the investors needs to claim for refund later. Further, long term capital gains are taxed only on the gains above Rs.100,000 annually. So, if your gains are less than one lakh no tax is payable on the withdrawals under SWP as against the slab rate in dividend plan.
Though switching from one plan to another attracts tax and or exit load, it is surely a beneficial preposition to switch from dividend plan to growth plan before March 31, 2020.