SWP, a better alternative of DDT
The major difference between a tax and DDTand capital gains is that DDT is not paid by investors but is rather paid by the fund house, whereas capital gains tax is paid by the investor itself. For regular cash flows and tax-free income, dividend plans of equity-oriented balanced funds have been opted by many investors for last some years. If investors want a regular income, they choose equity-oriented balanced funds because such funds have a history of paying fixed monthly dividend regularly and an informal assurance of regular income is also given by these funds. Systematic Withdrawal Plan, SWP is an alternative of Dividend Option.
Apart from this, the annual returns of these plans are between 8 per cent and 12 per cent p.a.
The popularity of such schemes may decrease As Budget 2018 has announced a 10 per cent dividend distribution tax (DDT) to ensure there is parity between dividend and growth schemes, where taxation is concerned.
Dividend distribution tax on equity mutual funds
The major difference between a tax and DDTand capital gains is that DDT is not paid by investors but is rather paid by the fund house, whereas capital gains tax is paid by the investor itself. Regarding this, the dividends received from all mutual funds remain tax-free in the hands of the investors. Besides this, the Budget has introduced a 10 per cent DDT on equity-oriented mutual funds so, for now, this 10 per cent will be deducted from the dividend announced and then dividend will be paid to the investor.
Earlier when DDT was not in action the entire declared amount of dividend was received by the investor thereby creating no difference between the amount of dividend actually declared and the amount of dividend received by the investors. After the introduction of DDT, the dividend received by the investors will be reduced by 11.65 per cent.
Systematic Withdrawal Plan (SWP)
Systematic Withdrawal Plan (SWP) is an alternative of Dividend Option. The Systematic Withdrawal Plan fetching of regular income from equity funds have become pretty much admissible as compared with earlier. With SWP optimization of long-term capital gains can be done by Investors themselves on the amount below Rs 1 lakh threshold withdrawn under as an SWP.
Amount Invested: Rs 25 lakh
Withdrawal: 12% per annum
The amount received per month: Rs 25,000
The amount received per annum: Rs 3 lakh
Exemption on profit per annum: Rs 1 lakh
So basically if we leave the return criteria aside than SWP is the best alternative to dividend plans.