“Dividends are unethical. They provide the impression that you’re getting one thing additional from the fund. Nevertheless, you aren’t. The dividend is simply your returns being given again to you.” – Parag Parikh, within the first unitholder meet held in Chennai and Mumbai, Nov 2014. Sources: this creator, who attended the Chennai meet as an NFO investor within the fund; a Moneylife article masking the meet, additionally reproduced by the fund home.
So, you’ll be able to think about our shock when PPFAS introduced the introduction of the Revenue Distribution cum Capital Withdrawal (IDCW) Possibility of their flexicap fund.
IDCW is the correct, but unappealing, identify given to the dividend possibility by SEBI. We will proceed to seek advice from the IDCW possibility because the dividend possibility, because it rolls off the tongue extra simply.
This transformation in fund attribute doesn’t have an effect on progress possibility buyers.
Why introduce it now? The AMC wouldn’t have launched it except it noticed a chance to construct AUM. For some buyers, dividend earnings from an fairness fund could also be extra beneficial (tax-wise, not risk-wise) than long run capital positive factors. Nevertheless, even then, the fairness publicity, significantly with this fund providing a dividend possibility, would nonetheless be comparatively small.
This beneficial tax remedy is simply out there to these within the decrease tax brackets. However therein lies the issue. Individuals are within the decrease slabs due to a decrease internet price. In different phrases, they don’t have enough funds to deal with vital market dangers. So this profit is essentially theoretical except one buys within the hope of “common” dividends (neither the quantum nor the frequency of dividends is assured).
Occasions change, administration modifications, and that’s simply the best way it’s. One can solely hope that the dividend possibility isn’t misbought or mis-sold to those that can ill-afford to tackle market dangers.
Now, contemplate some unrealistic conditions the place the full earnings is both from dividends or solely from fairness LTCG. Fairness LTCG refers to Lengthy Time period Capital Positive aspects (Charged to tax @ 12.5%-Coated u/s 112A. The primary 1.25L is tax free)
Case 1:
- 5.52L Dividends. Tax = zero.
- 5.25L Fairness Lengthy Time period Capital Positive aspects. Tax = zero.
Case 2:
- 12L Dividends. Tax = zero. ✅
- 12L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs. 87,750
Case 3:
- 15L Dividends. Tax = Rs. 1,09,200 ✅
- 15L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs. 1,26,750
Case 4:
- 17L Dividends. Tax = Rs. 1,45,600 ✅
- 17L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs. 1,52,750
Case 5:
- 17.95L Dividends. Tax = Rs. 165,360
- 17.95L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs 165,100 ✅
- The crossover is round right here.
Case 6:
- 20L Dividends. Tax = 2,08,000.
- 20L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs. 1,91,750 ✅
Case 7:
- 24L Dividends. Tax = 3,12,000.
- 24L Fairness Lengthy Time period Capital Positive aspects. Tax = Rs. 2,43,750 ✅
We reiterate that that is solely math and doesn’t signify actuality.
Allow us to contemplate some alternate options.
Case (a) An individual needs Rs. 10 lakh within the FY for bills.
- If the whole earnings comes from dividends and curiosity (in any proportion), the tax payable is zero. ✅
- If 50% comes from curiosity earnings and 50% from fairness LTCG, the tax payable is Rs. 48,750
Case (b) An individual needs Rs. 15 lakh within the FY for bills.
- If the whole earnings comes from dividends and curiosity (in any proportion), the tax payable is Rs. 1,09,200
- If 50% comes from curiosity earnings and 50% from fairness LTCG, the tax payable is Rs. 81,250
- If 2/third comes from curiosity earnings and 1/third from fairness LTCG, the tax payable is Rs. 48,750 ✅
Case (c) An individual needs Rs. 20 lakh within the FY for bills.
- If the whole earnings comes from dividends and curiosity (in any proportion), the tax payable is Rs. 2,08,000.
- If 50% comes from curiosity earnings and 50% from fairness LTCG, the tax payable is Rs. 1,13,750 ✅
However then once more, are these real looking? For many buyers, the fairness allocation of their portfolios after they want to obtain earnings will likely be a small portion (fortunately, it needs to be that means since most individuals could have excessive withdrawal charges and can’t afford to tackle an excessive amount of capital market danger). So the dividend possibility, if any, can be, effectively, needs to be small.
The dividend possibility is unreliable. They don’t seem to be assured (the identical applies to capital positive factors). So, fairness progress or dividend possibility shouldn’t be relied upon for fast earnings earlier than or after retirement.
At greatest, dividends from fairness can be utilized for discretionary spending; nonetheless, we would as effectively redeem and pay the LTCG tax after we want the cash.
The dividend possibility is simply marginally helpful for a small part of retail buyers (who mustn’t rely on it anyway).
Whether or not it comes from PPFAS or every other fund home, our advice stays the identical. Keep away from the dividend (IDCW) possibility and follow progress. If you need earnings from mutual funds, use short-term debt funds like liquid funds and cash market funds. These with the next internet price and better danger consciousness can contemplate arbitrage funds and different debt classes.
Dividends or CG from debt funds are taxed as per the slab (so select progress!). Use an fairness fund (direct plan, progress possibility) for progress in case your withdrawal charge is excessive sufficient. Please preserve it easy. Fund homes could change coverage, however fundamental private finance recommendation by no means modifications.
Related learn: Don’t get emotionally connected to your mutual fund investments!
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