Should we Pay 33.3% Tax or 14.5 % Tax ?

Investments Mutual Funds

Mutual Fund Investment can be Growth, Dividend or Dividend Reinvestment. It is quiet tricky to judge which one is best option for you.

In general, during extreme bear period you should invest in growth oriented Mutual fund with Growth option. You should invest capital through Systematic Invest Process ( SIP ) Route. Predefined money will be invested regularly through auto debit from your account. Investment horizon must be more than 5 years.

While market is trending and your capital grows substantially. You can change to Dividend Pay out option. In this case you are taking out your profit.

Mutual fund investment tips is for high return high risk fund, use dividend pay put and for conservative equity fund use Growth fund. You should have well chosen 4 or 5 mutual fund.

All these decisions has also dependency on tax deduction.

Here is a sample report on investments mutual fund in one of the hottest emerging market- India

Should you pay 33.6% income tax or 14.5% tax?

Lets consider the case of Mr.Dinesh and Mr.Ram\'s investment of Rs. 1 million after Finance Bill 2006.

Assumption:

1. Both of them fall into 33.6% income tax zone.

2. Dinesh has chosen dividend pay out option of the Mutual fund. He prefers to have tax free dividend income as cash flow. As per current tax law some of the balanced mutual fund is considered as Equity Mutual fund.

3. Rahul invested in Growth option ( Mutual Fund ) and withdraws Rs. 0.12 million. His withdrawals attracts Short term Capital Gain Tax

4. The scheme has earned 12% as distributable profit.

Dinesh\'s tax liability with Mutual Fund Dividend Pay out Option

12% of Rs. 1million is 1.2lah (0.12 million).

Dinesh will get dividend of Rs. 105240 only. This is because Mutual Fund house pays dividend distribution tax Rs. 14760.

Rahul\'s tax liability with Mutual Fund Growth Option

After one year, NAV became11.20.He redeemed 10714 units to get Rs.120000.

The Capital portion is 120000 (10/11.2) i.e. Rs. 107140.

Capital gain is Rs. (120000 - 107140) i.e. 12860 .

Short term capital gain tax is 33.6% of 12860 i.e. Rs.4330

Hence, Growth option is better from Income tax planning and deduction perspective.

Tax planning should be done before any taking any investment decisions.

Arindam

Investment Advisor

http://www.financial-planning-retirement.com