I have invested in monthly dividend payout plan of a MIP. Are MIPs required to pay dividend distribution tax? If yes, will it not be advisable to switch to growth option from tax angle? I do not need monthly income. I can wait for about 5 years to maximise my returns.
Yes, all dividends distributed by Monthly Income Plans (MIPs) are subject to dividend distribution tax of 12.81 per cent. And remember that this tax is not paid out of the AMC's pocket. Instead, it is deducted from the dividend amount. For example, if you receive a dividend of Rs 100, this means that the fund has actually declared a dividend of Rs 112.81 of which Rs 12.81 goes to the government as dividend distribution tax.
Now, coming to your core question. Why have you invested in a dividend plan if you don't need regular income from your investment? However, it's never too late to overcome one's mistake. Move to a growth plan immediately. Under the growth Plan, if you redeem after a year, you would only be liable to pay long-term capital gains tax @ 10 per cent. This is definitely lower than the dividend distribution tax of 12.81 per cent.
Ideally, MIPs should not be looked at from the monthly income viewpoint. Instead, it should be considered as any other mutual fund investments and a higher investment horizon in a MIP pays. For instance, in the past 3 years, MIPs have delivered a handsome annualised return of 12.5 per cent. And as currently, both debt and equity market is moving in a volatile zone, taking a long-term call is the order of the day.
However, in case after a year to two, you need regular income from your investment, you can opt for the systematic withdrawal plan (SWP). This is of three types and is the most tax-efficient way of receiving certain amount every month. By doing this, you will only be paying a long-term capital gains tax @ 10 per cent, which will turn out to be lower than the dividend distribution tax of 12.81 per cent.