What changed for your Mutual funds after Budget 2020?
February 20203 min read
The much-anticipated budget of India is finally presented with some major developments in the area of Personal Finance. Today we will touch upon the impact of the Union Budget 2020 on your mutual fund investments.
What are the new tax slabs about?
Many discussions have happened since the budget day about the newly introduced income tax slabs. However, when it comes to choosing any one of the slabs, the decision is totally dependent on one’s comfort level.
Instead of getting into the debate of which of the regime will help save more tax, we have a different approach of looking at this.
The differentiating factor in both regimes are that the previous one allows you to claim deductions and exemptions. However, in the new regime, you can not claim any deduction or exemption. This particular change will resonate well who make tax-saving investment forcefully.
We have always maintained a stance that in any investment liquidity is of utmost importance. Hence in the new regime instead of forcing ourselves to make the investment to save tax; an individual can invest to fulfill the goals and that way the money can be put to better use.
But if you are someone, who likes the discipline of investing via the longer lock-in investments; then you can stick to old regime and make use of exemptions.
No matter which regime you choose, the bigger picture here is to look at how the money can be utilized effectively and efficiently to fund the financial goals.
DDT Abolished in Budget 2020 – Dividend now taxable in Investor’s hands
With the move of abolishing the dividend distribution tax, FM granted the market’s long-pending wish. With DDT gone, the dividends will now be taxable in investor’s hands at the slab rate. Additionally, if the individual fund’s declared dividend is more than 5,000 per annum then the TDS will be deducted at 10%.
So, Should you invest in dividend plans of mutual funds?
The answer to this depends on your income tax slab. In the earlier regime, the DDT for equity schemes was 11.648 % (including surcharge & cess) and for debt schemes, it was 29.12% (including surcharge & cess).
If you are an investor in dividend schemes and wish to continue with those investments; then below is the ready reckoner for you to decide basis your tax slab:
The background for this analysis is that if you fall in the slab which is lesser than the previous DDT rates then you may continue with the dividend plan.
But if you fall in the highest tax bracket then dividend plans are not for you.
Do note that no matter which tax slab you are into if your annual dividend income is more than 5000 per annum from an individual scheme; TDS @ 10% will get deducted and you will have to claim it by filing your tax return.
Last but not the least, events like budget have a short term impact on capital markets which can be positive or negative. But the important thing during all this movement is not getting deterred from the investment path you are on.
As the famous author and investor Benjamin Graham said:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
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