In the last budget, the Finance Minister introduced a 10% Long Term Capital Gains tax on Shares and Mutual Funds, on gains above Rs. 1 lac.
He also introduced a 10% tax – to be deducted at source – on Equity Mutual Fund dividends.
This means that if you have opted for the ‘Dividend’ option when investing in a Mutual Fund, whenever they pay you a dividend, they will automatically deduct 10% tax. Unfortunately, they won’t give you a TDS certificate, which means even if you don’t have taxable income, this tax will be deducted and you can’t claim it back and also, if you have a taxable income, you can’t show this as ‘tax paid’. You are paying this tax even on the first rupee that you earn as dividend.
On the other hand, if you had opted for the ‘Growth’ option when investing in a Mutual Fund, the onus of paying the tax on any Capital Gains is on the investor. The best part is that Rs.1 lac of Long Term Capital Gains per year is exempted from tax.
So, what to do?
My suggestion is that you redeem all the investments that you’ve made under the ‘Dividend payment’ option and reinvest the amount in the ‘Growth’ option.
However, please understand the following:
- There may be tax liability when you withdraw from the ‘dividend’ option. The table below will help you to get an idea of it.
- If you require a regular income, then after switching to the ‘Growth’ option, you should start a SWP (Systemic Withdrawal Plan). However, the profits (if any) on the units that are withdrawn before a year passes, would be liable for Short term capital gains tax. So, it may be a better idea to hold back one year’s expenses in the savings account itself. For example, if you have 5 lacs under the ‘Dividend’ option and you withdraw it and reinvest it under the ‘Growth’ option immediately, it is considered a normal investment. So, if you withdraw Rs.10,000 before one year, any profits will be considered short term gains.
Here is the table to help you figure out the capital gains from sale of MF units. Every row corresponds to units from a fund bought on a particular date and sold on a particular date. If the units were bought on multiple dates or sold on multiple dates, each transaction has to be on a new line.
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