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Dividend Predicament

With DTC dividend will attract 5 per cent tax

I am investing in mutual funds with dividend option to get tax free returns in retirement. I recently read that Sebi has now directed all mutual funds to calculate dividend payments by a modified formula. How will this affect the dividend payouts and if there is likelihood of reduction in these payouts? Should I switch my investments to growth?
- Ramandeep Singh

Your strategy to invest in dividend option of mutual funds is commendable. This strategy worked well as it provided regular income which was treated as tax free income. Your observation on the Sebi move directing all mutual funds to calculate dividends from realized gains and not on pre-defined times each year is correct. This will definitely reduce the dividend payout.

Sadly, your pain does not end here. Once the direct tax code comes into play from 1 April, 2012, you will not only receive less dividend it will also attract a 5 per cent tax. To counter this development, it is advisable for you to move to the growth option and redeem your holding units to meet your income needs. As these will be long-term capital gains, you would at least not pay tax on the gains. However, make sure that you are not redeeming too much too soon by eroding your capital.

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