The minister also proposed to append a new section 194k in
the Income Tax Act which states “Any person responsible for paying income
arising from units of a mutual fund or a specified company must deduct tax at
the rate of 10 percent of such income”, according to the Finance Bill
2020. It was later clarified that the TDS will be imposed on only the dividend
pay-out over Rs. 5,000 per annum and no TDS shall be required to be deducted by
the mutual fund on income which is in the nature of capital gain. This gives
another reason for the investors to shift to the growth option and avoid the
deduction of TDS from the profit.
Withdrawal of DDT will have a positive impact on the NAV on
the fund as well. Since the companies have been exempted from paying DDT, this
will increase the yield which in turn will have a better appreciation on the
NAV of the mutual fund. Along with that we also believe that this change will
bring more awareness amongst the investors. Most investors think that the
dividend on a mutual fund is tax-free as they don’t understand the concept of
DDT. Thus, their effective tax liability will come down now.
We, at DreamLadder, always believed the growth option to be
better because of the power of compounding. The dividend option in true sense
is just like getting your money back, which is great if you are investing just
for cash flow management. But with the power of compounding your yield can grow
exponentially as the chances of spending are less in the growth plan. Now, with
the withdrawal of DDT and also imposing TDS, we believe that the trend of
shifting from the dividend plan to growth plan will accelerate as people will
start seeing the upside of the growth plan.