Getting a regular income besides our active income (job or business) through investing in mutual funds, stocks or buying property is an objective for many. Rental income from real estate is one way, dividend from stocks is the other way and in the past dividends from mutual funds were also in the same category. However, dividends from mutual funds are no more an ideal way of getting a regular income, we will explain later a more tax-efficient way to get regular income from mutual funds. Senior citizens especially retirees rely on this regular income monthly to meet their expenses, therefore, it is critical to have the right source.
Why Dividends from Mutual Funds aren’t a GOOD Option Anymore?
- Dividends in equity & hybrid funds were earlier taxed at 11.65% (including surcharge & cess)
- Dividends in debt schemes were earlier taxed at 29.12% (including surcharge and cess)
- These were paid by the mutual fund company as dividend distribution tax and not by the investor.
- Dividends which the investors received were net off these taxes.
- In this year’s budget, this rule got changed and dividends are not paid by the mutual fund company’s anymore but are taxable in the hands of the investor.
- This rate of tax on these dividends is based on an individual’s tax slab.
- So, if you are in a 30% + tax bracket, you pay 30% (plus surcharge & cess) on the dividend received.
- This is much higher than the earlier tax on dividends, making it less tax efficient.
- Basis this, one is advised to choose a growth option instead of dividend while investing.
Which is the Best Way Then to Get Regular Income From Mutual Funds?
You must have heard about SIPs, but it also has a little-known cousin called a Systematic Withdrawal Plan (SWP). This is how SWP works:
- You can make your investment in the selected fund, say fund A.
- Once the investment is done, you can choose a fixed amount and a date every month when you wish to get regular income from fund A.
- Then you need to submit that request with the mutual fund company online or offline.
- Once done, the mutual fund company will email you a confirmation and your SWP will begin from the subsequent month.
How is This a Better Option Than Dividend?
- This is a more tax-efficient way, let us see how.
- The short-term capital gains tax is 15% and that too only on gains or profit from your investment and not the entire amount you choose for SWP.
- The long-term capital gain tax is 10% and exempted up to a gain of INR 1 lakh. This means if you start your SWP a year after making the investment and your gain on the investment is less than Rs 1 lakh then you pay zero tax.
- Even if your gain is more than 1 lakh you just pay 10% on the gain or profit amount vs paying 30% on dividend on the entire dividend amount
- Through SWP, you are sure of a certain amount as monthly cash flow, whereas dividends can be higher or lower basis the dividend declared by the mutual fund.
One should choose SWP as the medium to get regular income from mutual funds irrespective of their tax bracket. This is a very convenient and the most tax-efficient way to fulfill your monthly expense obligations.