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MFs think up ways to skirt dividend tax

Neha Kapoor
Virendra Verma

MUMBAI, March 15

THERE is a lot of brainstorming happening in the mutual fund industry as asset management companies (AMCs) work overtime to come up with innovative ways to circumvent the dividend tax proposal announced in the Union Budget 2002-03.

One of these `brain waves' includes declaring bonuses instead of dividends. JM Mutual Fund, for instance, is planning to launch a bonus scheme where units in the form of bonus will be issued instead of dividend.

Speaking to Business Line, Mr Krishnamurthy Vijyan, CEO, JM Capital Management, said, ``the bonus plan will be launched on March 18. This would be similar to any other income plan, except that the returns to investors would be distributed in the form of new units.''

Under a bonus plan, if an investor invests Rs 100 (10 units of Rs 10 each) and the fund distributes Rs 10 (10 per cent) as bonus in the form a unit, the investor will have 11 units of Rs 10 each instead of 10 units. In this situation, an investor can withdraw his principal amount of Rs 100 without paying any tax on it. However, if the investor withdraws all 11 units, then he has to pay a capital gain tax on the 11th unit (Rs 10) at 35 per cent if sold before 12 months and at 10 per cent for over 12 months.

While some players are going ahead with the bonus scheme, others are undecided as the issue throws up a lot of grey areas regarding taxation and implementation.

Is bonus a distributed income? Will tax authorities consider it as another form of dividend? Also, what is the quantum of bonus that can be given out? These are just some of the questions that players are still seeking answers to.

Mr Naval Kumar, Managing Director, Standard Chartered AMC said, ``we are evaluating the bonus option at present but have no immediate plan of implementing it. In the meantime, we have stepped up marketing of our growth option scheme by educating customers of its benefits. Also, for people looking for a regular income, we are recommending the extremely tax efficient Systematic Withdrawal Advantage Plan (SWAP).''

SWAP is based on the principle of capital gains tax. Under this plan, tax is paid on that part of capital gains, which are embedded in the NAV of units redeemed and not on the whole amount received unlike in the case of receipt of income distributed under the dividend plan. Hence investors have the option of monthly, quarterly and half-yearly withdrawals and there is no exit load applicable on redemptions.

Another mutual fund that has recently announced a SWAP plan `to beat the Budget blues' is HDFC Mutual Fund for its Income Fund.

``SWAP has been prevalent in the industry. It's just that, given the current circumstances, it will come into sharp focus now,'' said Mr Kumar.

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