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Dividend reinvestment option

Most mutual fund advisors suggest dividend reinvestment option to debt mutual fund investors in the highest tax slab because the option results in almost nil capital gains

I am a mutual fund investor in in the 30 per cent Income Tax slab. I have invested a lumpsum in ICICI Prudential Long Term Fund (debt) and set a monthly Systematic Transfer Plan (STP) to ICICI Prudential Focused Bluechip Equity Fund (growth option). My mutual fund advisor has suggested that I shift from growth option to dividend reinvest option as I will save tax in the process due to DDT. Kindly let me know the difference between dividend reinvest and growth and whether dividend reinvest option really leads to tax savings?
- Aarti Padmanabh Walimbe

Most mutual fund advisors suggest dividend reinvestment option to debt mutual fund investors in the highest tax slab because the option results in almost nil capital gains. This is because the dividends declared by the mutual fund are reinvested and because of it there will be no capital gains when the fund is sold. Debt mutual funds sold before three years attract short-term capital gains tax at the marginal rate applicable to the investor. This means the investor in the higher tax slab will pay 30 per cent tax on the short term capital gains. However, this method is not such a great windfall for investors in the higher tax slab as it is made out to be. Dividends are tax-free for investors, but mutual fund houses pay Dividend Distribution Tax of 28.33 per cent on dividends declared. So the real saving is only a few percent points.

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