Debt fund payouts to shrink

BUDGET & THE INDIVIDUAL

Arbitrage between investing in mutual funds and directly in instruments reduced.

Individual investors in money market and liquid mutual funds will end up unhappy as the dividend distribution tax rate has more than doubled from 14.025 per cent to 28.33 per cent.

"This was a tax arbitrage option between investing in such instruments directly and through a mutual fund," says Gautam Mehra, executive director, PricewaterhouseCoopers.

The dividend distribution tax is deducted from dividends payable from such funds that declare dividends and the net amount is then distributed to investors.

So, for instance, if a fund was paying Rs 100 as dividend, investors would get Rs 85.98. After the change, this number now becomes Rs 71.67.

This dividend is not taxed in the hands of individuals.

The hike in dividend distribution tax, thus, will in lesser effective yields for investors on their investments.

"The move is intended to remove the arbitrage that investors had while making a choice between bank fixed deposits and these funds.

"On returns from fixed deposits, investors had to pay tax at the rate of personal income tax, while dividend distribution tax was effectively 14.025 per cent," says Anoop Bhaskar, head-equity, Sundaram BNP Paribas Asset Management further adding that, "the choice has now been reduced to that of service quality and more safety of funds."