Home > Money > Question
Need Expert Advice?Our Gurus Can Help

Salaried Individual Queries Tax on Dividends Received from Mutual Funds

T S Khurana

T S Khurana   |479 Answers  |Ask -

Tax Expert - Answered on Aug 06, 2024

A certified management accountant since 1993, T S Khurana is a fellow member of The Institute of Cost Accountants of India. His areas of expertise are income tax, specifically litigation cases, and GST.

Since the last 21 years, he has also been providing expert advice on financial matters, including investments and diversification of funds, and wealth building in the long term to his clients.
He believes that investment in real estate is the safest way for better returns and wealth generation over a period of time.

A former chairman of the Chandigarh Chapter of Institute of Cost Accountants of India, T S Khurana has also served as member of its technical committee.... more
Narender Question by Narender on Aug 01, 2024Hindi
Listen
Money

Hi Sir, I am a salaried class person, aged 57 years. I am paying Income Tax regularly since last 20 years. My question is why am i liable to pay tax on dividend received on mutual funds as i am investing my hard earned money after paying due taxes (Income Tax). The profit I got is from the money that saved after paying tax.

Ans: Income Tax is paid on the Income earned, may be from any source. If we go after your argument, then why business men should pay tax on their business income.
Dividend is your additional income from investments, hence it shall be taxed.
Most welcome for any further clarifications. Thanks.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
Money

You may like to see similar questions and answers below

Ramalingam

Ramalingam Kalirajan  |8620 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 29, 2024

Listen
Money
Dear sir I have invested many mutual funds in equity oriented in begining period. I have not consantration on which in growth option and which is dividend payout or reinvest option. So many mutual fund schemes is dividend reinvestment option and now last three years dividend income is taxable in the hand of me which is taxable income @ 30% and education cess% on tax amount . Now Please guide to me can I have change the dividend reinvested plans to growth option for the taxation purpose . Thanks & regards Pravin B Khatavkar
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

..Read more

Latest Questions
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

Close  

You haven't logged in yet. To ask a question, Please Log in below
Login

A verification OTP will be sent to this
Mobile Number / Email

Enter OTP
A 6 digit code has been sent to

Resend OTP in120seconds

Dear User, You have not registered yet. Please register by filling the fields below to get expert answers from our Gurus
Sign up

By signing up, you agree to our
Terms & Conditions and Privacy Policy

Already have an account?

Enter OTP
A 6 digit code has been sent to Mobile

Resend OTP in120seconds

x