Tuesday, February 4, 2020

MOVE AWAY FROM DIVIDEND STOCKS

BETTER TO MOVE AWAY FROM DIVIDEND STOCKS TO GROWTH OPTION OF EQUITY MUTUAL FUNDS


Dividends are now taxed !!!!

Mutual fund schemes do not pay ANY KIND OF TAXES including Dividend Taxes.
So, for a Highest Tax Bracket individual, its better to own a Mutual Fund than a Direct Equity.




The Dividends in the hands of investors was TAX FREE (upto Rs.10 lakhs in case of Direct Equities and UNLIMITED in case of Mutual funds)
But the Union Budget of 2020 has changed the dynamics.




The companies which earlier used to pay Tax on Dividends are no longer require to pay the same and instead the Dividends that are received in the hands of investors are taxed ACCORDING TO THE TAX SLAB OF THE INDIVIDUAL.

I know of numerous investors whose expenses is taken care solely by the Dividends they receive.





For example, one Mr.SN whom I know since 2002 receives about Rs.55 lakhs of dividend annually.

For him, earlier the entire dividend was TAX FREE.
But, about a couple of years back, the tax was applied for dividend above Rs.10 lakhs...

Now, the entire dividend is TAXED.

Mr.SN, who till as recently as 3 years was paying NIL tax is now required to pay upto 42% TAX (since he comes in the Highest Tax Bracket).
So...out of his 55 lakhs....he is now required to pay Rs.14,43,000 as per the Old Regime.
As per the New Regime his tax outgo would be Rs.14,58,600

3 years back - NIL TAX
last 2 years - Rs.11,31,000 tax
This year onwards - 14,43,000

Now....suddenly his NET income (income in hand) is down by a whopping 30%.
Large enough percentage to stump all financial plans and put his future in jeopardy.

Whats the options for him now?

Well Investing in Mutual Funds which yield him the same percentage of Dividends would be much better option for Mr.SN.

Why ?
Mutual funds that receive Dividends from Companies that they invest in, ensure that the NAV of the fund goes up (NAV = value)

A fund, most preferably a PSU Fund or a Dividend Yield fund, would be a safer and much better option for HNI investors like MR.SN.







CAVEAT : 

Do not invest in Dividend option of a Mutual fund scheme. 
Mutual funds will also deduct 10% TDS before distributing the dividend affecting the overall returns to you.
So, if you are supposed to get a dividend of Say Rs.20,000 the actual amount that will be credited to your bank will be 10% less...that is only Rs.18,000.


Investing in GROWTH option and opting for a Systematic Withdrawal Plan or a Redemption as and when required would be much better option.

So, in the above example, if Mr.SN invests in a Mutual fund GROWTH option and withdraws Rs.55 lakhs, then he would be paying a Tax of Rs.5,40,000 only

INCOME = 55,00,000
Exempted 1,00,000
Net = 54,00,000
10% on this is 5,40,000

Straightaway a huge saving from paying Rs.14,43,000 to just Rs.5,40,000 a saving of more than Rs.9 lakhs.....




Either way.....we have always advocated the GROWTH option as the best option as a Dividend in Mutual fund is YOUR OWN money coming back to you and not profit as such.

Of course, you are encouraged to take the help of a competent Financial Advisor who would guide on the right option.
the ultimate goal is NOT TO SAVE TAXES
BUT TO MAXIMISE RETURNS and have a Peaceful Retirement.
\

All the best
Srikanth Matrubai
Author of DON'T RETIRE RICH


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