The Quick Guide to Mutual Fund Tax Changes, 2018
Which investment option should you now choose — Growth or Dividend?
The Finance Bill, 2018 has introduced two major changes to Equity Mutual Funds:
Gains on Equity Mutual funds now taxed at 10%
Any Long Term Capital Gains (LTCG) over Rs 100,000 per year on Equity Mutual funds will now be taxed at 10%.
All gains until January 31, 2018 have been “grandfathered”. So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018. The start date of your holding remains the original purchase date.
Dividends on Equity Mutual funds now taxed at 10%
Once the Finance Minister decided to introduce Long Term Capital Gains on Equity Mutual Funds, he had to tax dividends at the same rate. Not doing so would have meant that one could avoid taxation on Equity Mutual Funds by switching to Dividend options.
As a result, all dividends in Equity and Equity Oriented Funds will now be taxed at the rate of 10%.
A summary of the new tax structure is below:
But wait, don’t forget that you need to pay a Surcharge based on your income. And the new Health and Education Cess of 4% (earlier 3%) is applicable to all taxes.
Which option should you now choose — Growth, Dividend Reinvestment or Dividend Payout?
Picking between Growth and Dividend depends on how long you plan to stay invested — and your current tax rate. When in doubt, apply the simple rule:
Always pick Growth. Pick Payout if you need a regular income.
The compounding effect of having your dividends reinvested gets really dramatic as time goes on. Over longer investment periods the decision to select the growth option and could mean tens of lakhs of rupees in additional investment returns. We’ve prepared a handy table below which explains how we would select between Growth and Dividend for our own investments.
If your current income tax rate is 30%, you would be better off picking the Dividend Payout option as your dividends are taxed at a lower rate of 29.12% as against your income tax rate of 30% (plus surcharge and cess)
This article first appeared on Moneycontrol.com on February 1, 2018.