I am planning to invest in equity mutual funds and looking for long-term investment. But I am confused if I should go for the growth or dividend option, as dividends are tax exempted. In case of growth, I will have to pay tax.
Manish
In the growth scheme, all the profits of the fund are invested back into the scheme. This is reflected in the growth of the scheme's NAV. Booking profits in this option implies selling units. Selling of units invites capital gains tax. Long-term capital gains tax is 20 per cent with indexation benefits or a flat 10 per cent, whichever of the two is more favourable. Long-term gains are defined as those, which occur after one year from the date of investment. Short-term capital gains tax is levied at the marginal rate and is applicable when units are sold within one year of investing. If you are in the highest tax bracket this works out to 30 per cent.
Under dividend option, profits made by the scheme are distributed in the form of dividends from time to time. For the current financial year dividends from equity funds are totally free of any tax. Neither the mutual fund nor the investor has to pay any tax on these dividends. However, there is no fixed time frame for the distribution of dividends and neither is the quantum of the dividend fixed. If the fund's NAV is less than its face value of Rs 10 then the fund cannot pay dividends.
Which option to invest in depends on what you want? If you want your investments to grow over time, growth option is the place to be in. If you want some portion of the profits distributed in a tax friendly manner then the dividend option is ideal.
This article was originally published on March 26, 2004.
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