You are a financial consultant and advisor providing advice to the investors. M.M. Khanna an investor approached you and presented the following facts: (1) He has an investment of ₹50 lakh in various equity schemes of Mu

Answer 2(b)(i) There was no dividend distribution tax on the equity schemes of Mutual Funds. Dividend Distribution Tax means that whatsoever the dividend is declared by the Equity Scheme of Mutual Fund, 10% of dividend amount payable shall be allocated as the Dividend Distribution Tax and to be deposited with the Tax Authorities. The dividend amount so received by the holder of units shall be tax free. There is no provision of any exemption for senior citizens. The tax is payable by Mutual Funds and the dividend so received by all the unit holders is tax free in their hands. Answer 2(b)(ii) This will not be deemed as tax deducted at source and shall not be deemed as advance tax. However dividend in the hands of unit holders irrespective of age will be tax free and will not attract any taxes. Answer 2(b)(iii) Yes, there will be impact on the investment in mutual fund, which could be understood by simple example. Suppose, an investor hold 10,000 units in HDFC Small Cap Fund and the NAV on the date of declaration. The record rate of the dividend is ₹ 30. Dividend declared is ₹ 3 per unit. In this case, ₹ 0.30 has to be departed as the tax deducted at source. NAV = ₹ 30 Dividend = ₹ 3 Dividend Distribution Tax = ₹ 0.30 NAV after Dividend = ₹ 26.70 Before the Dividend Distribution Tax, the NAV would have been ₹ 27. As such the value of Investment shall go down to the extent of Dividend Distribution Tax. Answer 2(b)(iv) The best alternative is to convert the investment from dividend payment to Guarantee Scheme. Option may be taken of SWP (Systematic Withdrawal Plan). It means a specific amount shall be withdrawn from the equity scheme of Mutual Funds and shall be credited back to the account of the investor. Whether it is dividend or withdrawal, it comes from the investment of investors only and as such one has to be prudent in taking decisions. Answer 2(b)(v) It shall not be beneficial to switch over to a debt scheme, because the Dividend Distribution Tax in Debt Scheme of Mutual Fund is much higher than the Dividend Distribution Tax in Equity Scheme of Mutual Funds.