Budget 2002 has changed the way dividend from debt funds will be treated. Dividend from funds will no longer be tax-free in the hands of recipients. The current position is that funds deduct a distribution tax of 10.2 percent from dividends and the dividend is a tax-free income in the hands of investor. As the current tax rules expires on March 31, 2002, it is perhaps the last opportunity for the dividend plans of bond funds to be lavish with their dividends for their investor's benefit. By paying dividend now, investors will be charged the lowest possible tax on their gains. Besides, it also provides an opportunity to get some losses on theirs books which can be used now or later to offset gains.
The expiry of the low tax rate for fund dividends has brought the urgency on funds to act investor friendly. And only funds with high NAV can afford to give lavish dividends. Following is an indicative list of such funds. Some of these funds are seriously considering and some have declined to comment on the likely dividend payout. The list is not exhaustive but an indicative list of funds with NAV above Rs 12 in the dividend plan, as on March 05, 2002.
Cash funds -- Birla Cash Plus-D (Rs. 12.57), DSPML Liquidity-DR (Rs. 12.41), Reliance Liquid Treasury-D (Rs. 12.27).
Medium-term Debt Funds -- UTI Bond-D (Rs. 15.37), Pioneer ITI Income Builder-DM (Rs. 14.30), K Bond Wholesale-DY (Rs. 13.91) and PNB Debt-D (Rs. 12.42).
Medium & Long-term Gilt Funds -- JM G-Sec PF-D (Rs. 15.70), Dundee Sovereign Trust-DY (Rs. 12.61), DSPML GSF Longer Duration-D (Rs. 12.45) and Pru ICICI Gilt Inv Plan-D (Rs. 12.25), Tata GSF-D (Rs. 12.23), Dundee Sovereign Trust-DH (Rs. 12.07).
This is how it will work. Take for instance UTI Bond Fund with its NAV at Rs. 15.37 as on March 5, 2002. Assume you invest Rs 1 lakh today and the fund gives a 50 per cent dividend before March 31, 2002.
Investment (@Rs. 15.37) Rs 1,00,000
Number of units bought 6506
Dividend Declared Rs. 5/- per unit (50%)
Dividend Tax (@10.2%) Rs. 3318.15
Dividend Net of Dividend Tax Rs. 29212.75
Value of Remaining Units Rs. 67469.10
As a result of this, you have a tax-free income of Rs. 29212 and you have also booked a loss of Rs. 32,530. You will have to hold your investment in the fund for three months to book a loss for a tax credit to offset gains.