Are you a fan of the well marketed 1% tax-free monthly dividend from HDFC Prudence fund — Dividend payout option? The Union Budget 2018 proposes a 10% tax on such dividends which may require you to look at your investment strategy.
What has changed in Union Budget 2018 for Monthly Dividend from Mutual Funds?
The Union Budget 2018 proposes to introduce a 10% tax on long-term capital gains (LTCG) earned from the sale of shares held for at more than 1 year. This 10% tax will also be applicable on dividend earned from equity and equity-oriented mutual funds. From April 1 2018, fund houses will need to deduct 10% Dividend Distribution Tax (DDT) before distributing dividend to investors. However, these dividends will continue to be tax-free in the hands of the investors. This means that the investors will not have to pay any tax on dividend income in addition to the 10% which has already been paid by mutual fund houses on their behalf.
Hitherto, income from dividends was tax-free. This attracted many investors to balanced equity funds with monthly dividend options. HDFC Prudence Fund and ICICI Balanced Fund are some of the most popular options in this category. The new tax regime will also impact dividend schemes of equity arbitrage funds.
Why this change?
Experts state that fund houses have been misusing the dividend option to provide an assured income to investors of equity-oriented balanced funds. Since this assured income may not be sustainable when market conditions are not favorable, uninformed investments in such funds might put investors in a spot. The introduction of tax is aimed to put an end to such misuse of the dividend option by fund houses. 10% Dividend Distribution Tax on equity mutual funds puts them in line with the 10% Long Term Capital Gains Tax on mutual funds.
How will you be impacted?
Starting April 2018, you can expect your monthly dividends from equity mutual funds to fall by 10%. For example, if you were earning ₹20,000 per month as monthly dividend, you stand to get only ₹18,000 per month.
What should you do now?
If your objective is to earn a fixed monthly income from your mutual fund investments, you should opt for Systematic Withdrawal Plan (SWP) in growth option of balanced equity mutual funds. Through a SWP, a fixed withdrawal is scheduled every month irrespective of market conditions. This ensures fixed monthly income and is highly useful for retirees. SWP is more tax-efficient than dividend since LTCG tax is applicable only on gains above ₹1 lakh which are withdrawn in a financial year. You would not be liable to pay any LTCG tax if the gains on your withdrawals is less than Rs 1 lakh under SWP in a financial year! Upwardly recommends you to switch your existing dividend mutual funds to the growth plan of the same funds.
To invest in the best balanced funds and earn a fixed monthly income, click here. To set-up an SWP today, drop a mail to firstname.lastname@example.org or call us at +91–73377–40002