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Will Budget 2018 cut tax on switch from dividend to growth option in mutual funds?
January, 23rd 2018

Many investors don't think much about growth and dividend options in mutual funds. However, when they become aware of the critical distinction (we will tell you a little later) between these options, they also become painfully aware of loads and taxes they need to pay to rectify their mistake.


Many investors don't think much about growth and dividend options in mutual funds. However, when they become aware of the critical distinction (we will tell you a little later) between these options, they also become painfully aware of loads and taxes they need to pay to rectify their mistake.

Switching from dividend to growth option or vice versa is considered a redemption in one scheme and a purchase in the second scheme. Because of this reason, investors may end up paying exit load and capital gains tax. However, this may end soon if government decides to waive taxes on such sale in the coming budget, say some mutual fund officials.

"We believe switching from dividend to growth or vice versa won't be considered redemption and purchase anymore. If it happens, investors will not have to pay any taxes and exit loads," said a mutual fund official.

Let us work the example of a new entrant to mutual funds to understand the significance of the move. Let us assume that this person invested in a largecap scheme under the dividend option. Soon the person realised that she made a mistake. Her goal was to create wealth.

And the secret of creating wealth is to always reinvest every penny earned from the investment and let the power of compounding to work. Instead of choosing the dividend option which shares the part of the profits periodically, she should have chosen the growth option which reinvests the profits.

The investor decided to switch to the growth option. Then she learnt that it is not possible to transfer the money from the dividend option to the growth option of a scheme. These two options run like two different schemes. If one wants to switch, one has to sell and buy into the other scheme. So, she decides to sell her investment and switch to the same scheme under the growth option.

Since she has invested in the new scheme a week ago, she was told that she has to pay an exit load. She also should pay a short-term capital gains tax on the returns earned on her investment. That means, she will pay an exit load of one per cent plus 15 per cent short-term capital gains tax. Not a very small price to pay.

The Budget 2018 may decide to do away with this anomaly and allow investors to switch from dividend to growth option or from growth to dividend option without paying taxes, say fund managers.

 
 
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