Investment in equity-linked mutual fund schemes and ULIPs will now be less profitable for investors, with the government proposing to levy a 5 per cent tax on the dividend paid by these entities.
“The mutual fund or the life insurer or the person responsible for making payment of the distributed income on its behalf, as the case may be, shall be liable to pay tax to the credit of the central government within a period of 14 days from the date of distribution or payment of such income, whichever is earlier,” the Direct Taxes Code (DTC) Bill said.
As such, these MFs and life insurance companies which part invest the funds in the equity market (ULIPs), are now liable to pay tax at the rate of 5 per cent on the dividend paid.
At present, there is no DDT applicable to equity fund schemes or insurers on income distribution to unit or policy holders.
This norm is applicable to mutual fund schemes and insurance policies that invest over 65 per cent of the total proceeds in equity shares, or equity-oriented mutual funds.
“There could be come adverse impact on investments in equity-linked MFs and life insurance schemes. The 5 per cent DDT comes in as an additional burden on tax payers as ultimately, their dividend amount would get reduced,” Deloitte Tax Partner Sunil Shah said.
Considering an investor has a dividend option, the quantum of income from equity-linked mutual funds or ULIPs would be slightly lower when the DTC comes into effect from 1st April, 2012.
The dividend yield of any MF scheme is calculated on the net asset value (NAV) of that scheme. When funds declare a dividend of 20-30 per cent, it is calculated on the face value of the scheme.