Budget 2018 brought in a 10% long-term capital gains tax and a 10% dividend distribution tax on equity funds and shares. However, the new tax will only go into effect from 1st April 2018, prompting several funds to rush to declare dividends before March 31, 2018.
The list includes both small and large funds as mentioned in the table below (only an indicative list).
|Fund||Dividend per unit||NAV (as of 20th March 2018)||Record Date||Dividend as % of NAV|
|DSP Blackrock Equity Fund||16||46.057||8th March||35%|
|SBI Small and Midcap Fund||9.1||33.0766||9th March||28%|
|HDFC Equity Fund||5.5||55.784||22nd March||10%|
|JM Equity (Monthly Dividend)||9.0||20.9264||22nd March||43%|
|Aditya Birla Sun Life Top 100||2.1||17.050||23rd March||12%|
When can mutual funds declare dividends?
Mutual funds are only allowed to declare dividends from ‘realised profits’ or profits made on the ground by selling their assets higher than purchase prices. They cannot declare dividends if they realised losses from selling their assets or by using fresh investor inflows in the fund.
However, the change in tax rules has prompted many funds to realise a larger share of the gains they are sitting on than they would have otherwise.
What happens to NAV?
When a dividend is paid out, the fund’s NAV falls by a corresponding amount. As a result, you have a notional loss on the fund value while the loss has been compensated through the dividend payment.
Many high-value investors who have capital gains can set the gains off against the losses booked by selling the mutual fund units (as its value has declined to the extent the dividend had been paid out). However, if the units are bought within three months prior to the dividend record date, the investor can get tax benefits only if he sells the units after nine months.