The dividend option lost its charm after the Government in Budget 2020 abolished the dividend distribution tax and shifted the obligation of paying tax on dividend income to investors as per their slab rate.
Mutual fund investors are increasingly opting for the dividend option due to income tax relief of ₹12 lakh provided under the new tax regime.
Currently, dividend earned from mutual fund investments are clubbed with individual investors’ income and taxed as per their slab rate. Since the Budget has provided provisions for exempting income tax up to ₹12 lakh, many aged people, pensioners and mid-level salaried class investors are preferring dividend option. This provides a regular income for investors rather than just relying on capital appreciation.
Mutual funds distribute dividend or ‘Income Distribution-Cum-Capital Withdrawal’ from the capital gains from its underlying investments. After distribution of income, the fund’s net asset value decreases by the amount paid as dividend.
Madhu Nair, CEO, Union Mutual Fund, said the incidence of investors opting for dividend option has increased in last few months as they are looking for regular income from their investments.
“The Budget provisions has made receiving dividend more attractive for mid-level employees and pensioners,” he added.
The dividend option lost its charm after the Government in Budget 2020 abolished the dividend distribution tax and shifted the obligation of paying tax on dividend income to investors as per their slab rate. This typically meant that if an investor falls in the 30 per cent tax bracket, his dividend income will also be taxed at 30 per cent, irrespective of the total amount earned through dividend.
Earlier, the income tax laws provided for an exemption of the dividend income for investors by levying dividend distribution tax on entities paying the dividend.
Jignesh Madhwani, Founder & Director, Torin Wealth Management, said after the new tax regime offering tax-free income up to ₹12 lakh, there is a potential interest in dividend options, especially from retirees and conservative investors.
However, one must remember that in equity mutual funds, dividends are not assured and depend on the scheme’s distributable surplus, he said.
“A systematic withdrawal plan provides more predictable cash flows while retaining growth potential. Still, for those who value periodic income without redeeming units, the dividend option may regain traction in certain investor segments,” he added.
Sunil Subramaniam, director of independent think-tank Sense and Simplicity, said under the new regime total income of up to ₹12 lakh is exempt though similar exemption but this does not apply to capital gains tax—including gains on equity mutual fund.
However, once annual income crosses ₹12 lakh, dividends push taxable income higher and possibly raise tax liability, he said.
Dividend option is suitable for investors who need periodic cash flow and remain strictly within the exempted income slab, he added.
More Like This
Published on September 6, 2025