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Taxing Dividends

Once the DTC comes into effect, dividends from equity funds will be taxed, even if reinvested…

I am currently invested in the dividend reinvestment option of a few large-cap funds. As I don’t need the money for the next five years, does it make sense to opt for the growth option instead? What would be the advantages of such a move?- Ramesh Menon

When it comes to risks and returns, there is very little to choose between the growth and dividend reinvestment option in a diversified equity fund. In case of the growth option, the NAV of the fund keeps changing as per the fund’s performance, whereas in the dividend reinvestment option, the number of units increases as and when the fund declares dividends. Currently, dividends from diversified equity mutual funds are not taxed, hence in the dividend reinvestment option the entire dividend is reinvested in the fund. However, from April 1, 2012 when the new direct tax code comes into effect, as per the current text of the code, dividends from equity funds (even if reinvested) will be taxed. In that situation, the growth option would definitely be a better proposition to consider.

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