Dividend options of debt funds are still attractive for investors falling in the highest tax slab of 30%.
The hike in dividend distribution tax (DDT) in debt funds for retail investors from 12.5% to 25% (plus surcharge and cess) proposed in the Budget FY2014 gets effective from today. For retail investors, the DDT on liquid and money market funds is already 25%. Now, all debt funds will have a uniform DDT of 25%. The surcharge on DDT too has been increased from 5% to 10%.
Accounting for the hike in surcharge, the DDT on liquid funds will now be 28.32% for retail investors. For corporates, the DDT will be 33.99% in liquid and debt funds. So, how does it affect your clients? Since the DDT is 25% now, the post-tax return will be less. However, investors who fall in the highest tax slab of 30% can still opt for dividend option since they have to pay 28.32% in debt funds compared to 30.9% in bank fixed deposits. If your investors’ time horizon is more than a year you can advise them to invest in growth options of debt funds as they can benefit by paying a less tax of 10% without indexation or 20% with indexation; (plus education cess).
Short term capital gains are taxed as per the investor’s taxable slab. An alternative is to opt for SWP if your clients need a regular income. SWPs are more tax efficient as compared to bank fixed deposits. Investors belonging to the highest tax slab will have to pay 10.3% on the SWP income compared to 30.9% in bank fixed deposits. To avail this benefit, investors have to opt for SWP after a year. Fund houses pay DDT on the distributed income but dividends are tax free in the hands of investors.
The hike in dividend distribution tax (DDT) in debt funds for retail investors from 12.5% to 25% (plus surcharge and cess) proposed in the Budget FY2014 gets effective from today. For retail investors, the DDT on liquid and money market funds is already 25%. Now, all debt funds will have a uniform DDT of 25%. The surcharge on DDT too has been increased from 5% to 10%.
Accounting for the hike in surcharge, the DDT on liquid funds will now be 28.32% for retail investors. For corporates, the DDT will be 33.99% in liquid and debt funds. So, how does it affect your clients? Since the DDT is 25% now, the post-tax return will be less. However, investors who fall in the highest tax slab of 30% can still opt for dividend option since they have to pay 28.32% in debt funds compared to 30.9% in bank fixed deposits. If your investors’ time horizon is more than a year you can advise them to invest in growth options of debt funds as they can benefit by paying a less tax of 10% without indexation or 20% with indexation; (plus education cess).
Short term capital gains are taxed as per the investor’s taxable slab. An alternative is to opt for SWP if your clients need a regular income. SWPs are more tax efficient as compared to bank fixed deposits. Investors belonging to the highest tax slab will have to pay 10.3% on the SWP income compared to 30.9% in bank fixed deposits. To avail this benefit, investors have to opt for SWP after a year. Fund houses pay DDT on the distributed income but dividends are tax free in the hands of investors.