You have decided to invest in mutual funds. You have selected the best mutual funds for you. You have also decided whether you want to invest lumpsum or through Systematic Investment Plans (SIPs) or STPs.
There is one decision that you are yet to make. Which investment option to select?
Growth or dividend or dividend re-investment?
In this post, we will discuss the difference between the three options. We will also discuss various elements that can influence investors’ preference for one of the options. First, let’s see what these options are all about:
What are Growth and Dividend options in Mutual Funds?
#1 Growth option
No dividend is declared or paid to the investor. This means you do not get any cash flow from the investment until you sell your MF units. It is more suited to investors who are looking for long term growth. Under such a plan, an investor realizes the greatest benefit of compounding.
#2 Dividend option
Under dividend option, the mutual fund scheme pays a dividend on a regular basis and the NAV of the fund goes down by the same amount (a bit more as we would see later). It is more suited for investors who desire regular income from their investment. Please note the payment of dividend (or its quantum) is not guaranteed. It is the discretion of the fund manager. Moreover, the MF schemes can pay the dividend only from the profits generated by the scheme. Therefore, in bad times, the ability to pay dividends (especially for equity funds) can be severely compromised.
#3 Dividend re-investment option
Dividend reinvestment option is a variant of dividend option. Under this option, dividend is not paid out to you but gets reinvested in the scheme i.e. you get additional units for the dividend amount. Please understand this dividend re-investment will be considered a fresh investment and these new units will be subject to lock-in restrictions. Can be a problem in case of ELSS. Exit load and capital gains implications will also be there if you sell off these new units soon after. Since the scheme does not pay out anything to you, you can look at dividend re-investment option as an alternative to growth option.
The choice between the dividend reinvestment and growth options depends upon investment horizon, applicable income tax slab and tax treatment of capital gains and dividend income.
Please note that the fund portfolio is exactly the same for growth, dividend or dividend reinvestment plans.
How Mutual Fund Investments are taxed?
Mutual fund taxation keeps changing. Till FY2018, long term capital gains and dividends from equity mutual funds were exempt from income tax.
However, Budget 2018 changed everything. Now, even LTCG from the sale of equity funds and dividends from equity funds are taxed.
Here is how the mutual fund taxation looks like. I have included the rates for both residents and non-residents.
For capital gains, the applicable surcharge shall be 25% if your annual taxable income exceeds Rs 2 crores. Surcharge is 37% if your annual taxable income is more than Rs 5 crores.
Now, the tax treatment of capital gains and dividends is one of the deciding factors between choosing growth or dividend or dividend re-investment option.
If the tax regime provides favourable tax-treatment to one kind of income (capital gains or dividends), you must invest in a more tax-friendly option.
If capital gains get better treatment, Growth option is better.
If dividends get better tax treatment, Dividend (or reinvestment) option is better.
By the way, if there were no tax difference, there wouldn’t be much difference between growth and dividend because you can always sell your units to generate income (instead of waiting for the dividend). Alternatively, whatever dividend you generated could be reinvested. Unfortunately, that’s not the case. And that forces us to do some work.
Dividends or Capital gains?
There are two kinds of income on which a person may be required to pay tax. Dividend income or Capital gains.
Under a growth fund, all income will be in the form of capital gains (since no dividend is paid out). Under the dividend/dividend re-investment option, income will be in form of both dividend and capital gains.
If a mutual fund pays the dividend, its NAV will go down by the same amount and will reduce potential capital gains on the sale of units. In fact, if you select the dividend option, the NAV of the fund will go down by more than the amount received (or re-invested) as dividend because of Dividend Distribution tax (DDT).
As per the current tax laws, the dividend received from mutual funds is exempt from tax in your hands. However, the fund house deducts the TDS (or DDT) before paying the dividend to you. And that explains why the NAV falls more than the dividend received. For more on how DDT is calculated, refer to this post.
What to do in case of Equity Mutual Funds?
Suppose an equity MF unit cost you Rs 100 at the time of purchase. After 2 years, NAV of the same unit has risen to Rs 140. Subsequently, the MF scheme announces a dividend of Rs 30 (for dividend and dividend reinvestment plans). The investor sells the units soon after. Exit load implications not considered.
Dividend option: The MF scheme announces a dividend of Rs 30, you get a dividend of Rs 30 per unit (total dividend of Rs 30,000). Due to DDT, the NAV will fall to Rs 106.12. If you decide to sell MF units subsequently, your capital gains will be Rs 6.12 per unit (total of Rs. 6,117.4). After capital gains tax, your net in-hand cash is Rs 1,35,481.
Growth option: Since there are no dividend payments and you sell off the unit, you will make capital gains of Rs 40,000. At LTCG tax of 10.4% (includes 4% cess), your CG tax liability is Rs 4,160. Your net cash received is Rs 1,35,840 (higher than the dividend option).
Dividend re-investment: No payout will be made to the investor. Dividend (declared and not paid out) will be used to buy additional units (Additional units = Dividend declared/Revised NAV i.e. 30,000/106.12=282.7 units). In this case, dividend is not paid and all the cash inflow will be only at the time of redemption. After accounting for LTCG tax, net cash received is Rs 1,35,481.
In case of equity funds, short term capital gains (less than 1 year) are taxed at 15% while Long term capital gains are taxed at 10% (before cess & surcharge). Dividends are taxed at about 11.46%. Moreover, LTCG on equity funds is exempt from tax up to Rs 1 lac per financial year. No such relief for Dividends. If you incur a loss on sale of equity funds, you can use it to set off your capital gains. No such thing for dividends.
Clearly, in case of equity funds, capital gains get more benign tax treatment. Therefore, in the case of equity funds, growth option is a far better choice.
Many investors invest in dividend option of equity mutual funds for regular income. It is not a good choice. Why? Refer to this post.
You may argue that the STCG on equity funds is 15%. Effective impact of DDT is much lower. You are right. However, equity investments are not really for the short term. Moreover, dividend (or its quantum) or are not guaranteed. In my opinion, this debate is meaningless.
In case of equity funds, Growth option is a clear winner.
I do concede there may be merit in considering dividend options of arbitrage funds (because they behave like debt funds but are taxed like equity funds).
One aspect that I have not considered in the above illustration, is that of surcharge on capital gains. Surcharge @10% or 15% on capital gains is applicable if your income exceeds Rs 50 lacs or Rs 1 crore respectively. Now, there is a surcharge of 25% and 37% if your taxable income is in excess of Rs 2 crores and Rs 5 crores respectively. Do note surcharge @12% is always applicable on dividend distribution tax (irrespective of income tax slab). If surcharge is applicable to capital gains, the tax difference between growth and dividend will almost vanish. In fact, if your annual income is more than Rs 1 crore, the dividend option will be more tax-friendly. However, we have to see applicability too. DDT will reduce your corpus and affect compounding of your money. Moreover, we have to also consider LTCG exemption of Rs 1 lac and flexibility to set off capital losses, and potential set off against the minimum exemption limit of Rs 2.5 lacs (or as the case may be). Dividends offer no such relief. My vote goes to Growth for equity funds.
What to do in case of Debt Mutual Funds?
Again, the tax treatment is a key factor.
In case of debt funds, short term capital gains (holding period upto 3 years) are taxed at your slab rate. If you are in 5% tax slab, you have to pay 5%. If you are in 20% and 30% tax bracket, your STCG on debt funds will be taxed at 20% and 30% respectively. Cess extra. Surcharge if applicable.
LTCG (holding period above 3 years) is taxed at 20% after accounting for inflation.
The dividend distribution tax is 25% in case of debt funds. Given the way DDT calculation works and including cess and surcharge, your effective tax hit is 27.97%.
In the case of debt funds, the choice is quite clear.
If you are in 5% or 20% tax brackets, the Growth option is a clear winner (whether for short term or long term). This is because DDT is way higher.
If you are in 30% tax bracket and you are investing for less than 3 years, the Dividend/dividend re-investment option is a better choice (since your capital gains will be taxed at over 30%. DDT is lower).
If you are in 30% tax bracket and you are investing for more than 3 years (or you are not sure if you will need this money in 3 years), Growth option is a better choice (since Capital gains are taxed at only 20% after indexation).
In the below tabulation, I show the workings for short term capital gains. I have chosen the quantum of dividend in a way that Capital gains tax liability does not arise in case of dividend options.
You can see that if you plan to sell your debt funds investments before 3 years, your tax slab becomes a key determinant. If you are in the highest tax bracket, you will find the dividend option better. Others will benefit from the Growth option.
If you have been holding for over 3 years (rather your investment horizon is less more 3 years), then Tax on LTCG (20% after indexation) is far better than DDT. So, Growth is a clear winner.
PersonalFinancePlan Take:
Growth option is a clear winner in most cases. Here is a crisp recap of what you should do. From the perspective of decision making, replace “holding period” with “Investment horizon”.
This post was first published in March 2015 and has been updated since.
59 thoughts on “Mutual funds: Growth or dividend? What should you choose?”
Good Article Deepesh!
Thanks GB!!! Glad that you liked the post.
Kindly write new topic how to increase existing direct fund sip
Hello
I want to know more about new mutual fund offering some basic information, facts or suggestions.
Is any blog or post by you.
Didn’t get your question properly. Do you want to know about new fund offers (NFO) from mutual funds?
Hello Deepesh,
I have limited idea about Mutual Funds, by reading your articles I’m enhancing my knowledge, really appreciate all your efforts and worth reading your articles.
I have a question to ask, I want to invest Rs 5lakhs, here I’m expecting good returns (~ >12%) monthly. On this monthly returns I want to have an SIP, not sure if this comes under dividend reinvestment.
Can you please help me with fund names where I can invest my 5 lakhs and to which SIP plan name I can route the returns and can I do all these things online?
FYI… Currently I have monthly SIPs in ICICI, SBI, Reliance and HDFC.
Thanks,
Ashok
Hi Ashok,
Am glad you have found the articles useful.
I assume you are talking about annual (and not monthly) returns of 12%.
SIP is not an investment product per se. It is merely a way to invest in mutual funds. So, when you start a SIP, you give a mandate to invest a certain amount (say Rs 5,000) per month in a particular mutual fund.So, on a specific date every month, the money will get debited from your bank account and get invested in that mutual fund scheme.
SIP is one of the best ways to invest in mutual funds (especially equity mutual funds).
It won’t be right on my part to give recommendations with doing proper risk profiling, review of your existing portfolio and your financial goals.
However, there are a few MF recommendations that I gave on a television show recently. The videos are on the website. All the funds mentioned are good funds and you can pick up accordingly.
Please understand asset allocation is far more important than the fund selection.
Moreover, do not invest any money in equity mutual funds that you might need in the next 5-7 years. Equity instruments take time to play out. For short term goals, invest in debt mutual funds.
If you want to sit with me and get specific advice, please visit “Our Offerings” section on the website.
Hello Deepesh,
Thank you very much for your response.
Sure I would like to sit with you and let me visit “our offerings” on your website.
Thanks,
Ashok
This is query regarding Tax Treatment of GS- Liquidbees or any LIQUID Mutual Fund scheme with Dividend Re-investment option.
If I go specific to Goldman Sachs Liquidbees, does it becomes virtually tax-free on redemption even in short term (< 3 yrs holding) in the hands of Individual Investors ?
As this scheme comes with compulsory dividend re-investment option, it doesn't let its NAV get increased beyond 1000. Thus no capital gain at point of time. Thus virtually tax free I guess.
Moreover as It pays the dividend as additional units, thus DDT is expected to be already paid by fund housse.
Does this makes this scheme virtually tax-free in the hands of individual investors at the time of redemption even in short term duration below 3 years of holding period, as NAV at the time of redemption is not above it's NAV at the time of entry ?
Does this similar tax-treatment goes same with any Liquid Mutual Funds with dividend re-investment option ?
Sarnendu,
Tax treatment for all liquid funds is same.
Mutual fund scheme pays tax (dividend distribution tax) from your money only. They don’t pay it from their pocket.
Consider dividend reinvestment as getting dividend and reinvesting that dividend through fresh purchase of units.
So, even though you are not paying capital gains tax (or pay less since NAV has stayed constant), DDT more than makes up for it.
Morevoer, DDT is fixed (25% + 12% surcharge + 3% cess). With capital gains, you at least get indexation benefits if you hold units for more than 3 years.
This query is in quest of finding a tax-efficient way of short-term (may be 3-6 months) Return Optimization of idle cash in my Equity Delivery Trading account,which generally functions as cash back-up in wait of better Valuation opportunity.
If my delivery Trading account is with Discount fee brokerage houses, then idle cash doesn’t earns anything sitting over there; as I directly cant’t deposit that idle cash into Liquid MF without taking the overhead as well as transaction expenses of shifting it back to Saving bank Account for finally depositing that idle cash into any Liquid MF for that short duration.
Thus Liquid ETF seems to be filling this void by providing better return than Saving Bank Account;
& virtually Tax-Free in the hand of Individual Investor as well because redemption NAV doesn’t exceeds purchase NAV in case of GS Liquidbees (the only Liquid ETF listed in NSE/BSE).
Did I reached to correct conclusion w.r.t. Tax Treatment of GS Liquidbees whose NAV doesn’t changes ?
No. The AMC is paying income tax from your money. You pay it or AMC pays it. Does not matter much.
AMC is paying DDT.
But what I am getting in my hand on redemption of original units plus DDT paid additional units is virtually tax free as exit NAV is as stagnant as entry NAV (in case of GS Liquidbees).
If this cash generated by redemption of DDT paid additional units is providing return of 5-7% annualized return over original amount invested in original number of units, then its giving me relatively higher return over saving bank account return.
I hope now I have correctly expressed what I intended.
OK. You invest Rs 100. NAV grows to Rs 110. AMC decides to pay dividend of Rs 10. But it has to pay tax. That tax is around Rs 2.8. So, you get Rs 7.2. It gets reinvested. SO, total corpus is Rs 107.2. You sell it. No capital gain (since NAV is 100 only).
Case 2: You invest Rs 100. NAV grows to 110. You sell it. Capital gain is Rs 10. You pay tax on Rs 10. You fall in 20% tax bracket (or 10 or 30%), you pay Rs 2 as tax. You are left with Rs 108.
So, the income tax is being paid from your money only in both cases.
Yes, you clarified your point perfectly. If an investor get the choice, then Growth Option should always be preferred over Dividend Payout or Dividend re-investment option for Tax Efficient Optimized return.
But unfortunately for Return Optimization of Idle Cash in my (Zero Brokerage) Equity Delivery Trading Account, we don’t have any choice of multiple Liquid ETFs (for picking 108 over 107.2) other than GS-Liquidbees which comes with compulsory Dividend Re-investment option only.
Whereas for my Retirement Corpus & Contingency Corpus specific monthly deposits, I must stick with Growth Option only as I am doing until now.
Great!!! All the best!!!
Other than Sort-term Optimized Return Utilization of Idle Cash in my Zero Brokerage Equity Delivery trading Account, this Financial Literacy article came as great help for me to dig deeper into GROWTH vs DIVIDEND RE-INVESTMENT option choice w.r.t. my CONTINGENCY CORPUS deposit specific decision-making.
Tax-Treatment is suppose to be the yardstick to focus upon before reaching to any conclusion !
Will keep bothering you with your future upcoming articles touching my topic of interest 😀
Highly obliged for such healthy insightful discussion on this particular topic !
Regards !!!
Thanks Sarnendu!!! You inputs made this post richer.
Hi Deepesh,
Why do you say there is no capital gain in the first case on selling? Isn’t it Rs. 7.2?
Buy and sell value is same at 107.2. Therefore there is no capital gain.
Nice article and everything made perfect sense! That is, until I came across this post http://mutualfundgenius.maheshkaushik.com/2015/06/why-mutual-fund-dividend-reinvestment.html just below yours in google search results.
Top 4/5 search results on this topic come to the same conclusion as your advice. Only the above post has a very different take.
I think there is something wrong in his logic and/or math but can’t be sure. Can you provide some clarification and reassurance? Thanks! 🙂
I can understand. It does not make sense. 🙂 His assessment is incorrect.
He got his data wrong. I checked historical NAVs for HDFC Top 200.
On January 3, 2000, the NAV for dividend option is 26.7 (and not 9.107) as used by him.
That will impact the assessment.
Hope that answers the question.
Hello.
Nice article. I have a query regarding my father’s retirement corpus which is around 50 Lakhs. He is getting pension of around 30k to meet his monthly expenses. He is ready to invest for more than 3 years. Pls suggest me funds with percentage allocation if possible. If you need any more info, pls feel free to ask me. Look forward to helpful reply. Thanks.:)
Dear Manjot,
If the investment horizon is only about 3 years, stick to short term or ultra short term debt funds.
Equity investments are not suited for such short investment horizon.
I am 58 years of age. Retired. Have 60 lakhs as corpus. Have been advised to invest in 7 Mutual Funds in the dividend option to earn regular tax free income. Would appreciate your advice.
Dear Sir,
If you have Rs 60 lacs of corpus and you have been asked to entire amount in EQUITY mutual funds, this is just the right time to chuck your advisor.
I might be jumping the gun. Quite possible your adviser has recommended debt funds.
In any case, it is not advisable to rely on MF dividends. You do not control dividend announcements.
Secondly, dividends may not be tax efficient in case of debt funds.
Sir i am just unable to get clear picture.all i am able to understand is that growth option and divident re investment is same.plz clarify.sorry if its a dumb doubt but this doubt is really confusing me.i have invested 8lacs in growth throught sip and 5 lacks in liquid in divident reinvestment.plz advice
Awaiting ur reply
Biku,
If you are in doubt, invest in Growth option.Do not invest in dividend reinvestment.
Under Growth option, no dividends are paid.
Under dividend reinvestment option, dividends are declared. However, rather than paying to investor, the dividend gets reinvested in the scheme.
So, technically growth or dividend reinvestment option would appear same. However, the difference is due to dividend distribution tax, etc. For equity funds, dividend distribution tax is Nil, but in case of debt funds, it is 28.4% (including cess and surcharge).
Hi Dipesh,
I wish to invest in mutual fund for 15 to 20 years. I wish to start 3 sips of Rs 2000/- each. I am planning to invest 2000 in large cap , 2000 in midcap and 2000 in balance fund. Please advice with name of mutual fund plans.
Thanks
Hemant.
Dear Hemant,
I offer investment advice after looking at many aspects. Hence, I charge a fee for the same.
You can go through the offerings section for more details.
In your case, I think you have chosen the right spread of funds.
You can watch some of the videos in the right sidebar to get names of a few good funds.
Alternatively, go to ValueResearchOnline, pick up 5-star rated fund in each of the category. You will do well.
Hi Dipesh,
I understand that in case Money Market and Liquid Schemes, hloding period of Less than 365 days is Short Term.(Taxed as per individual tax slab of the investor) 365 days or more is Long Term(Taxed at 10% without indexation OR 20% with indexation, plus 3% cess).
Please confirm.
Hi VRK,
Liquid funds and money market schemes are variants of debt funds.
So, short term is less than or equal to 3 years (and not 365 days).
Long term is greater than 3 years.
Short term gains will be taxed at your marginal income tax rate (or income tax slab).
Long term gains will be taxed 20% after indexation. Yes, cess and surcharge, if any, will also be charged.
Hi Deepesh
I fall in 30% slab. I have a question on debt funds about the difference between dividend & dividend reinvestment mechanism. I think NAV for both of them is same for same dividend payout schedule (daily, weekly etc.).
I am considering it as short duration, because for long duration growth is the best option.
1. In Dividend option: I’ll be getting regular dividend minus DDT) with no IT liability. At the end of investment period, I can sell my units with small STCG because the NAV would not go much higher. I am not considering exit load because my holding period shall be higher than AMC’s lock-in restriction.
2. In DRI option: Fresh units will be bought from my dividend minus DDT. I’ll have more units after same investment period as in the first case. Now my query is,
1) For original no. of units, there will be no exit load.
2) For units bought later, the most recent ones will come within exit load, right?
So how is this plan better than the first one? Is there some way of withdrawal to neutralize this exit load.
Hi Atul,
Invest in growth option. You don’t control dividends. There is not much difference in taxation (around 1.1%).
In any case, since you are investing for short term, the dividend may not be even be declared during your holding period.
By investing in dividend or dividend reinvestment option, you lose the flexibility of getting favourable long term capital gains treatment if you happen to hold for more than 3 years. Coming to your questions:
1. ok
2.
1) You will have to check scheme details for exit load. Typically, exit load is not so much of a problem with debt funds.
2) Didn’t get your question. All units have exit load. The only way to avoid exit load is to hold the units long enough.
Mr. Deepesh,
I would like to invest 40Lakhs as lump sum in MF with 8-10 years time frame; Please advise 6 best mutual funds with moderate Risk profile. Thanks.
Regards,
Mohid
Dear Mohid,
Please understand I provide investment advice on professional basis alone.
Request you to visit the offerings section on the website.
http://www.personalfinanceplan.in/our-offerings/
Hi Deepesh,
Seeking suggestion/advice from side.
In case I have a lump sum amount with me and want to invest in a systematic manner in long term MFs. Is it a good idea to get the SIP and link it to your savings account or invest the lump sum in a liquid fund and then start an STP.
Also this brings one more question, if the liquid fund with Daily Dividend is opted for what will be tax treatment.
Hi Vipin,
About lump sum investments, I have a separate post. Suggest you go through the following post.
http://www.personalfinanceplan.in/mutual-funds/how-to-invest-lump-sum-amount-in-mutual-funds/
There is no right or wrong approach. Pick up the one you are comfortable with.
Frequency of dividend does not affect taxation. Dividends from debt funds are tax-free in the hands of the investor. However, AMC pays dividend distribution tax (DDT) from your funds before distributing. The tax is in excess of 28%.
If you are in 10% or 20% tax bracket, you are actually more tax indirectly.
Suggest you avoid daily dividend option. Will add unnecessary clutter to your bank account statement too.
Opt for growth option.
Thanks Deepesh,Got my answer to the first question.
For the other given your feedback, since iam in 30% tax bracket, seems dividend (reinvested)option of Liquid Fund would still be OK.
Moreover, if I plan to initiate an STP from this fund immediately, any amount debited from this fund would be treated as redemption and will attract highest slab taxation. Isn’t it?
Vipin,
STP is redemption and subsequent investment.
Capital gains tax liability will arise.
Under dividend option, you don’t control dividend.
What would you recommend for an 18-year-old that is making pretty good income and wants to retire by 35. Capital gain or dividend option?
Growth option is better
What cagr one can expect if one is doing sip in an equity fund having dividend payout option for a period of 15 to 20 yrs
No idea.
Btw, CAGR is not right measure to calculate returns for volatile investments such as equity (when you have multiple tranches of investments).
10% looks a reasonable number.
Dividend payout will affect the final corpus.
What cagr one can expect if one is doing sip in an equity fund having dividend payout option for a period of 20 yrs or more
HI Sir,
I am new to Mutual Funds. I am 27 year old. Want to invest 4000 from my salary every month to MFs..
What I am looking at is to invest 50% in Tax saving schemes and the rest 50% in other long term scheme(Open Ended so that even if I cant invest say post 3/4 years, i can stop investing but not redeeming anything and leaving it for long term till i can start reinvesting). Please do suggest what are the MFs that i can invest and what type etc…
Thank you
Hi Lohith,
Can’t tell you the exact funds. Am bound by SEBI regulations.
You are quite young. You can afford to be aggressive unless you are saving for the short term.
If you saving for the long term,you can invest in equity funds. Pick up a good tax-saving fund or choose one balanced fund.
Hi Deepesh,
Many thanks for the informative write-up. Would you please help me with this query – as I understand the DDT rate for debt mutual funds (FY 2018-19) is 25% + 12% Surcharge + 4% Cess. As DDT is to be applied on a gross basis, the effective rate comes to 38.8266%. So would dividend payout / reinvestment option still be preferred for an individual in the 30% tax slab for holding period less than 3 years?
Many thanks for your time
Numbers can sometimes trick us.
Let’s understand with the help of an example.
If you receive a dividend of Rs 100 (in hand) in a debt fund, that means DDT (including cess and surcharge) of 38.82.
Total reduction in NAV= 138.82
Your in-hand dividend=100
Effective tax hit=38.82/138.82=27.96% (which is less than 30%)
We shouldn’t compare 30/100 with 38.82/100
we should either compare 30/70 with 38.82/100 or 30/100 with 38.82/138.82.
Hope this clarifies.
I have discussed this aspect in detail for equity funds in this post.
https://www.personalfinanceplan.in/budget-2018-dividend-growth-equity-funds/
However, the calculations are exactly the same.
Hope this helps.
Thanks so much for the prompt response. Yes, it certainly helped. I had read the link previously but was focusing on the DDT of 12.942% for Equity MF and not the effective tax hit of 11.46%. I had applied the same logic to debt MF and hence the confusion.
Thanks so much for clarifying.
You are welcome!!!
Very useful article.
In case of Equity funds, in cash floe terms all options return Rs .135840 , this is a surprising revelation. If I were to consider cashflow as a key element , I can be indifferent to all options then.
I don’t know how it will work out in IRR terms!!.
In the taxation table ,I notice that for Debt funds, the period has got interchanged between long term and short term . Am I correct ?
Thanks Ravindran!!!
Growth option returns more. Rs 135840. Dividend options give Rs 135,481.
At the same time, I have not considered the impact of surcharge on capital gains in the illustration. Surcharge @10% or 15% on CG tax is applicable if your income breaches Rs 50 lacs or Rs 1 crore respectively. That will take out any difference between growth and dividend option.
However, LTCG has Rs 1 lac exemption, potential for loss set off and set off against minimum exemption limit.
In my opinion, IRR is not as relevant in this case since the portfolios are exactly the same.
Not sure if I got your question about tax table right.
Hi Deepesh
I read your article regularly and find very interesting.I am a NRI from Canada and retired from service.in india .
I wish to invest Rs 3 lacs in mutual fund on line either Equity or Debt with reasonable risk..I need regular income from my investment from the 1st month onwards(Either dividend or SWP). I expect around 9 % return. considering tax implications
I am not allowed to invest in any AMC on line except UTI mutual fund being a NRI from Canada,although Google search mention that there are 8 AMC. I spoke to few of them like SBImf,ICICImf etc ,but still as of now they do not allow on line investment.
Can you please suggest me some AMC where i can invest online and get my desired target..
Dear Sir,
To be honest, MF investments from US and Canada are a complete mess.
I do not know about Canada but US has an additional problem w.r.t to taxation.
The last I checked, L&T and Sundaram also accepted.
In any case, 9% post tax is not really possible without some risk. Being an NRI, you will be subject to TDS on capital gains.
Moreover, you must also consider taxation of your Indian income in Canada.
For you, an NRE FD can be a good choice. You must still consider how Canada taxes your interest income.
Hi,
I have 8-9 mutual funds and all are regular in equity…
—- 3 funds shows profit and since 2-3 yrs I have not invested in those funds…
—– 5-6 mutual funds sip shows negative return and it’s currently active since 2 years..
If I want to sell and purchase direct funds.. will I have to pay long term capital gain?
Dear sir,
I have a question regarding taxation of the dividend re-investment of equity mutual fund.
If I get X amount of dividend which automatically gets reinvested and buys Y units.
If sell my entire that particular MF units during tax filing.
What should be the cost of the those Y units should it be zero or X?
Please advise.
Vineet
Hi Vineet,
In case of dividend re-investment, the units are not free of cost.
Y units will have a cost attached. NAV on the day of dividend re-investment.
The tax liability will be calculated accordingly.