I am a retired person and have invested in some mutual funds with dividend option with a view to earning periodic returns that are tax free. I have read that SEBI has directed all mutual funds to calculate dividend payments by a modified formula. I wish to know in what way will it affect the quantum of dividend payouts and if there is likelihood of reduction in these payouts? Is it advisable to switch the investments to growth option?
- Keshav Sachdev.
For retired people, the strategy to use the dividend option in equity mutual funds worked on two counts-regular income and the tax free nature of this income. You are right with your observation on the Sebi move that directs all mutual funds to calculate dividends from realized gains and not on pre-defined times each year. This will reduce the dividend that is paid out. Your agony does not end here; it's a double whammy once the Direct tax code gets implemented 18 months from now. You will not only receive less dividend it will also attract a 5 per cent tax.
This article was originally published on December 08, 2010.
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