Personal tax tweak is fine, but mutual funds too need freedom from DDT

KS Badri Narayanan | Updated on October 25, 2019

The Centre had imposed dividend distribution tax in the 2018 Budget to check mis-selling in balanced funds, as investors were not aware of the risk involved.

So, to give a boost to the sagging economy, is a rebate on personal income tax next on the cards?

If a section of the media is to be believed, the Centre is planning to hike the taxable income limits, especially the Rs 10-lakh slab, which attracts a 30 per cent rate at present. However, the tax cut may come with some strings, like scrapping some tax-breaks, including the one offered on house rent payments and interest earned on some bank deposits.

It has been widely reported that the proposal may be part of the Union Budget to be unveiled in February, 2020.

If the government wants to put more money in the hands of individuals, they should consider some tax-breaks to mutual fund investors too.

Currently, dividends from corporates or mutual funds attract dividend distribution tax (DDT) at the rate of 10 per cent. While companies pay dividend from their profit, it is tax-free in the hands of investors up to Rs 10 lakh. However, investors, who receive more than Rs 10 lakh as dividends per annum, need to pay DDT at the rate of 10 per cent.

MF investors suffer

But mutual fund investors suffer DDT, even for receiving dividends from monthly dividend paying funds.

Hybrid funds such as Tata Hybrid Equity Fund, HDFC Balanced Advantage Fund, ICICI Prudential Equity and Debt Fund and L&T Hybrid Equity Fund pay routine dividends on monthly basis. These schemes are great hits with retired people and those looking for monthly income to meet their routine expenses.

Though hybrid funds pay regular dividends, some of them have suffered capital losses. The Centre had imposed DDT in the 2018 Budget mainly to check mis-selling in balanced funds, as investors were not aware of the risk.

On the other hand, debt funds which are also intended for regular income investors suffer high level of DDT too. HDFC Short-Term Debt Fund, Baroda Short-Term Bond Fund and L&T Short-Term Fund are some of the schemes that give routine dividends to investors.

For instance, Baroda Short-Term Bond Fund offers regular monthly dividends. According to Valueresearchonline, it has given a return of 8.42 per cent over a five-year period and 7.80 per cent in three years.

Moreover, it is one of the funds that have a fixed monthly record date for dividends ― the 27th of every month, ensuring a regular payout like pension.

DDT should be removed to promote the distribution of dividends to serious investors; this will further improve the sentiment of long-term investors in the market.

The Centre could reconsider its decision or at least exempt from tax MF dividends paid to senior citizen investors whose annual income is less than Rs 5 lakh, if need be after they file their income tax return.

The DDT has pushed some investors to high-yielding taxable bonds, which face credit risk. If the Centre tweaks the rule, it would not only enhance the level of cash in the hands of investors, especially retired people, but also attract fresh investments.

Published on October 25, 2019

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