Mutual funds (MFs) are working out an array of options to ease the burden of dividend tax on investors.
On offer is an option to switch over to growth funds from dividend-paying schemes.
Another option is systematic withdrawal plans (SWPs) wherein investors of income funds can automatically redeem a part of their holdings on pre-determined dates.
While mutual funds fear an immediate flight of capital, triggered by the incidence of dividend tax falling on investors, fund managers say withdrawals could be a knee-jerk reaction.
"Before rushing to redeem units, many of them will pause to reflect on the choices available and we propose to persuade them to stay with us by offering multiple-options," a senior official with a private sector fund said.
Milind Nandurkar, debt fund manager with Sun F&C Mutual Fund, said that growth schemes offer investors the scope to avoid taxes on dividends received by them, the alternative option of exiting after a year gives them the benefit of being taxed at lower long-term capital gains tax of 10 per cent. Investors also have the option to go in for SWPs, he said.
Elaborating on this, managing director of Standard Chartered Mutual Fund, Naval Bir Kumar said: "Investors desiring a regular source of income can opt for a SWP, under which income funds will, on pre-determined dates, automatically redeem part of their units."
Under SWP, investors can reduce the dividend tax even on short-term withdrawals. According to him, it would be advisable for investors to switch from dividend option to growth option before March 31, 2002, so that their cash flows in the form of dividends moves from taxable dividend income to capital gains.
He said that investors who stay invested for less than a year can avail of a dual benefit -- potentially higher yields from short-term debt funds and higher liquidity. "If they invest in the growth option, then the returns will be through short term capital gains and can be offset against short term capital losses," he said.
Mutual funds are, however, hoping that the taxable income in the hands of investors will prompt investors to stay with them longer. "The profile of the investor will change," a fund manager said, pointing out that short-term investors will no longer look at the mutual funds as an attractive option.
Krishnamurthy Vijayan, chief executive officer of J M Capital Management Pvt Ltd, said that such switching would be most advantageous for those falling in the tax bracket of more than 10 per cent.
Profitable, high dividend paying corporates would derive the maximum advantage from the scheme wherein they can redeem their original units at net asset value, this ensures liquidity and they are not liable to tax, and hold on to their bonus units for more than a year and pay out long-term capital gains tax at lower rates.
