Let's do some calculations to find out what is efficient, paying tax for Dividend from shares or paying the Mutual Fund(MF) expense.
We will assume a hypothetical scenario of a person (A) owning shares and he gets dividend and lets say he reinvents the dividend, he does not need the money
Let's say another person(B) has an MF which just for the sake of comparison has a bunch of stocks whose dividend is exactly like the previous case. But here the MF is in growth option so basically reinvested back.
What if you are in the highest tax paying level, what will be efficient?
For this let's take the Dividend Yield of the Nifty 50 which at this time of writing is 1.3%
So lets say Person A has invested Rs 10000 and so he will get a dividend in this year as
Rs 10000 * 1.3% which is Rs 130.
Even though he reinvests it he has to pay the tax for this dividend income (Rs 130) which will be 30% Rs 39 as tax.
Now the Person B scenario even though the MF gets dividend it does not have to pay tax
So Person B ends up paying the expense which for a Direct MF Index Fund will be 0.21%.
Let's assume the best case scenario of 15% appreciation so Rs 10000 has become
Rs 11500
For this new amount the expense paid is Rs 23 still cheaper than paying Dividend tax (Rs 39)
Does it mean that MF expense is always cheaper than Dividend tax…. need not be.
There are 3 variables in this equation
It's about the Dividends of the stocks you hold. There are companies which are paying huge dividends and some which pays very very little
What is your income tax level? Are you in 5%, 20%,30%?
What is the expense ratio of your MF. A direct MF index may cost 0.21% but there are MFs with expense ratio above 1%. If you are using regular MF even 2% is possible
