Mutual funds distribute their income as dividend. An investor has
the option of receiving the dividend or opting for reinvestment of
the dividend. Another choice before him is the growth or cumulative
option. In this case, there is no dividend declared. The
appreciation in the corpus is reflected in growth in the value of
the NAV.
The only difference between the dividend reinvestment option and the
growth option is that in case of the former, the investor gets more
units depending on the dividend declared and the NAV of the scheme
on date of declaration of the dividend while in case of the latter,
there is no change in the number of units but the NAV value
increases with increase in market value of the scheme’s investments.
Deciding between the dividend reinvestment option and the growth
option is mainly on account of tax.
In the case of equity mutual funds, if the investor holds on to his
investment for more than a year, capital gain earned on sale of the
units is termed as long-term capital gain, which is completely
tax-free. Also, dividends declared by equity mutual funds are
completely tax-free. Hence, deciding between dividend and growth in
this case makes no difference. However, if the equity mutual fund is
held for less than one year, capital gains on sale of the units are
termed as short-term capital gains and are taxable at the rate of 10
percent*. In this case, it makes more sense to opt for dividend,
which is tax-free.In the case of debt mutual funds, if the
investor holds on to his investment for more than a year, capital
gain earned on sale of the units is termed as long-term capital
gain, which is taxable at 10 percent without indexation or 20% with
indexation. Dividends declared by debt mutual funds attract a
dividend distribution tax of 14.1625 percent* in case of individual
investors and 22.66 percent* in case of corporate investors. In this
case, if the investor needs liquidity, he can opt for the dividend
payout option. However, if he is looking at capital appreciation, it
makes sense to opt for the growth option.
* plus surcharge @ 10% of the tax as applicable and education cess @ 2% of
tax plus surcharge and secondary and higher education cess @ 1% of
tax plus surcharge as per the Income Tax Act |
