My father passed away last year.He had way back in 2000 invested money in mutual funds. After his death i got the mutual funds transferred in my name. there are few mutual funds for which i am receiving payout which is credited to my saving account and i will add this amount to my total income and pay relevant income tax. There are few mutual funds where as i understand the dividend received is converted into units and added to the existing units is this taxable or i have to pay tax only when i redeem the mutual fund. IF it is to taxed than how do i find the dividend received for each mutual fund . Thanking you in advance

Ans: Assuming that you have salary income and dividend income, you can use ITR 1 for filing under income from other sources.

Since dividends have now become taxable in the hands of the investor, the earlier exemption limit is longer available.

 

Ans: Dividend income is taxable under the head Income from other sources. Tax rate will depend on total income and tax regime opt during the year.

Ans: Hello and thank you for writing to me. Please accept my condolences on the passing of your Father.

The units on which are you are receiving payouts will be under the IDCW Payout Option, previously known as the dividend payout option.

The IDCW Reinvestment option is where you the AMC declares a payout and then uses that amount to allocate additional units to you at the then prevailing NAV. Under the IDCW payout option, as you a payout is declared, you need to pay taxes on it despite not having received the funds.

It is best that you consult a tax advisor to help you and clear all doubts.

Ans: Dear Pravin B Khatavkar,

It's commendable that you've taken the initiative to reevaluate your mutual fund investments, especially concerning their taxation implications. Let's delve into your situation and explore the best course of action.

Assessing Your Current Scenario

Your decision to invest in equity-oriented mutual funds reflects a sound long-term investment strategy. However, the choice between growth and dividend reinvestment options holds significant implications, particularly in terms of taxation. Dividend reinvestment may seem convenient, but it can inadvertently increase your tax burden, as you've experienced.

Understanding Tax Implications

The dividends reinvested are considered as income and taxed accordingly, which can be a burden, especially if you're in the higher tax bracket. At 30% tax plus cess, the tax liability can significantly impact your overall returns. This scenario underscores the importance of revisiting your investment choices to optimize tax efficiency.

Exploring the Transition to Growth Option

Transitioning from dividend reinvestment to the growth option can be a prudent move from a taxation perspective. In the growth option, dividends are not distributed but instead reinvested in the fund, leading to capital appreciation. This approach can potentially reduce your tax liability, as you're not immediately taxed on the reinvested dividends.

Considering the Long-Term Benefits

Switching to the growth option aligns with your long-term investment objectives by optimizing tax efficiency and enhancing overall returns. By allowing your investments to grow without the immediate tax implications of dividends, you can potentially compound your wealth more effectively over time.

Navigating the Transition Process

Transitioning from dividend reinvestment to the growth option is relatively straightforward. You can typically request this change directly through your mutual fund distributor or online portal. However, it's essential to consider any exit loads or tax implications associated with the switch, ensuring that the transition is cost-effective.

Seeking Professional Guidance

While the decision to transition to the growth option appears beneficial, it's crucial to consult with a Certified Financial Planner (CFP) to assess your specific circumstances comprehensively. A CFP can provide personalized guidance tailored to your financial goals, risk tolerance, and tax situation, ensuring that your investment strategy remains aligned with your objectives.

Conclusion

In conclusion, transitioning from dividend reinvestment to the growth option can potentially optimize tax efficiency and enhance long-term returns. However, it's essential to seek professional guidance from a Certified Financial Planner to navigate this transition effectively. By aligning your investment strategy with your financial goals, you can strive for greater financial security and peace of mind.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in