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Investing in mutual funds post Budget 2020? Keep these things in mind

mutual fund, mutual fund investment, Budget 2020, Budget 2020 India, impact of Budget 2020 on mutual funds, TDS on dividend income, DDT, new tax slab

Post Budget 2020, there are several changes that may change the mutual funds’ investing prospect. When you look at the impact of each announcement on the mutual fund investment, the tax implications of various mutual funds may change entirely after the proposals of Budget 2020 are implemented. So, now you need to keep some crucial points in mind while investing in mutual funds.

Do you want select the newly-proposed tax slab?

The newly-introduced tax slab allows investors to choose the right investment tool as per their financial plan, and there is no obligation to invest in the ELSS fund to save taxes. So, now there is no need to wait for 3 years for the lock-in period to end. Under the new tax slab, you can select the appropriate mutual fund scheme in sync with your financial goals, risk appetite, and return expectations. So, if you don't want to get into the process of investing to save the taxes and are looking for a goal-oriented investment, then mutual fund is one of the investment products for you available in the market.

Don't want to pay TDS on dividend income?

In Budget 2020, it's been proposed to levy Tax Deduction at Source (TDS) at 10% on the dividend income when the distribution amount to an investor is higher than Rs 5000.

If you don't want to go into the nitty-gritty of TDS payment, then you can opt for a growth scheme while investing in mutual funds.

It would be important to mention here that even if the TDS is deducted on dividend in a mutual fund scheme, the option is always open to claim the TDS refund, provided your tax liability is lower. If your tax liability is expected to be higher than the TDS deducted on dividend, then you need not be concerned because any way you have to pay the taxes later on.

What to do as DDT taxable in the hand of investor?

Under the existing rule, the dividend income from equity mutual funds is subject to DDT at 11.65%, and the debt funds are subject to DDT at 29.12%, before distribution to the shareholders. In the Budget 2020, it has benn proposed to abolish the DDT, and now the dividend income received by the investors would be taxed as per their applicable tax rate.

So, if you are currently in the 30% tax bracket, then you are liable to pay tax at 30% on the dividend income, and if you fall in the lower tax bracket of 20% or 5%, then you have to pay tax at such applicable rate. As now dividend income will be taxable in the hand of investors, the investors in the top of the tax brackets will pay higher tax amounts, and investors falling in the lower tax bracket will pay a lower tax amount.

If you don't want to pay tax on the dividend income, then investing in the growth option under equity mutual fund would be a better option. The LTCG up to Rs 1 lakh on equity fund in a financial year is exempt from taxes, and LTCG above Rs 1 lakh is taxable at 10%. If you fall in a higher tax bracket than 10% or 15%, then paying the LTCG tax at 10% rate or STCG tax at 15%, respectively, will still be more beneficial for you.
You may also plan to opt for the SWP option for regular income with growth option, instead of regular dividend payout option to avoid tax on dividend income.

It's time to plan your investment wisely in sync with your financial goals. If you are into any dilemma or have any confusion related to your investments, then don't hesitate to consult your investment advisor.

(By Amit Jain, Director-Wealth Management, JRK Group)