The redeemed proceeds are subject to capital gains tax (short-term or long-term) depending on the holding period and asset-class orientation of the scheme invested in (equity/fixed-income / commodities).
As I plan to invest in an equity mutual fund through systematic investment plan, should I select dividend or growth option?
—K R Badri
Dividend options are used by investors seeking a regular income from their investments. However, investors should note that the dividends are not guaranteed. Mutual funds pay dividends out of any investible surplus, which are in essence a return of your capital invested. This return of capital defeats the purpose of investing which is to grow your investment corpus. As a result, the investor loses out on any subsequent gains that he would have made on the dividends received till the end of his investment horizon. Also, from a taxation perspective, the dividends received are currently taxable in the hands of investors at their marginal rate of tax. Investors would therefore lose out on the favourable tax treatment on long-term capital gains offered by mutual funds. Hence, the growth option is better than the dividend payout option.
I am retiring from service after six months. I have invested in equity mutual funds. How should I go for a systematic withdrawal plan?
You can opt for withdrawing some portion of your accumulated corpus via the systematic withdrawal plan (SWP) route. The redeemed proceeds are subject to capital gains tax (short-term or long-term) depending on the holding period and asset-class orientation of the scheme invested in (equity/fixed-income / commodities).
Given you have invested into equity schemes for over eight years, the withdrawal amounts corresponding to units held over one year would likely attract long-term capital gains tax at the rate of 10% (excluding cess, and any surcharge if applicable) on capital gains in excess of Rs 1 lakh per annum. For units held for periods up to one year, short-term capital gains tax is levied at 15%.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]