I read somewhere that with the DTC it maybe better for those holding mutual funds to opt for growth option rather than the dividend because of the change in the tax treatment. What should I do with my investments?
— Devinder Pratap
You are right. Currently, dividend paid out by equity funds is tax-free. The Direct Tax Code (DTC) has proposed to tax the dividends distributed by equity mutual funds at 5 per cent. This clearly puts dividend plans of equity mutual funds at a disadvantage vis-à-vis their growth plans. In a growth plan, only the securities transaction tax (STT) at the time of redemption after one year is to be paid. On the other hand, in a dividend plan you will have to pay DDT when dividend is paid out and STT at the time of withdrawal (after one year).
You should consider moving to growth plans with the DTC to protect yourself from the avoidable burden of 5 per cent DDT. But check your holding period of the fund to avoid short-term capital gains and applicable exit load.
This article was originally published on May 18, 2011.
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