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Lavish Dividends for Tax-wise Investors

Budget 2002 has changed the way dividend of funds will be treated. As the current tax rules expire on March 31, 2002, perhaps this is the last opportunity for the dividend plans of funds to be lavish with their dividend. And only funds with high NAV can afford to give lavish dividends.

Budget 2002 has changed the way dividend from companies and funds will be treated. Dividend will no longer be tax-free in the hands of recipients. It will be taxed at the individual rates of taxation applicable to them with effect from April 1, 2002. Only the dividends of equity funds will henceforth be taxed at a flat rate of 10 percent.

Tax-wise investors should consider mutual funds now, to get around the second part of the old saying: "Nothing is certain in life but death and taxes." With the tax-filing season upon us, many investors are trolling around the taxation system in search of ways to boost returns. Some high dividend funds are likely to oblige investors with lavish dividends.

Currently, debt funds deduct a distribution tax of 10.2 percent and the dividend is a tax-free income for investor. Equity fund dividend is absolutely tax-free. As the current tax rules expire on March 31, 2002, perhaps this is the last opportunity for the dividend plans of funds to be lavish with their dividend. By paying dividend now, investors will be charged the lowest possible tax on their gains, in case of debt funds, and none at all for equity funds. Besides, an opportunity to book notional loss three months hence to offset any future 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. Funds have been quick to act. Pioneer ITI has announced dividends in its three equity funds: Bluechip –10 percent, Prima – 30 percent and Prima Plus – 20 percent. The record date for the same is March 18, 2002. Zurich has also announced 15th March as the record date for dividend in equity and balanced funds -- Zurich India Equity, Zurich India Prudence, Zurich India Taxsaver and Zurich India Top 200.

Among Debt Funds, Birla Sun Life declared an unusually high dividend of 22.69 percent in its cash fund -- Birla Cash Plus. And the record date is March 28, 2002. And Zurich has also announced 22nd March as the record date for dividend in bond funds -- High Interest Fund, Sovereign Gilt Investment and Provident plans.

Following is an indicative list of funds with high NAV who can give hefty dividend now. The indicative list includes bond funds with NAV above Rs 12 in the dividend plan, as on March 08.

DSPML GSF Longer Duration-D (Rs. 12.54), DSPML Liquidity-DR (Rs. 12.40), Dundee Sovereign Trust-DH (Rs. 12.12)., Dundee Sovereign Trust-DY (Rs. 12.65), JM G-Sec PF-D (Rs. 15.82), K Bond Wholesale-DY (Rs. 13.84), Pioneer ITI Income Builder-DM (Rs. 14.21), PNB Debt-D (Rs. 12.29)., Reliance Liquid Treasury-D (Rs. 12.27)., Tata GSF-D (Rs. 12.27) and UTI Bond-D (Rs. 15.37).

This is how it will work. Take for instance Birla Cash Plus (NAV - Rs. 12.577 on March 8) and you invest Rs 1 lakh today. The fund will give Rs. 2.269 per unit on March 28.

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



Resulting from this dividend, you will earn a tax-free income of Rs. 18040 now and you also assume a notional loss, which you can book after three months. This could be helpful in setting off future gains.