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Dividend tax cut cheered

BS Corporate Bureau

The cut in dividend taxes back to the earlier level of 10 per cent in conjunction with the 1-1.5 per cent cut in administered rates has enthused the mutual fund sector, which has been struggling along of late.

The funds sector was not really expecting a cut in dividend tax in the Budget. Sandesh Kirkire, fund manager in charge of debt schemes at Kotak Mahindra Mutual Fund, said, "It is a positive development. Now, we will see a lot of fund flows into the sector, especially in income funds."

Nikhil Johri, chief executive, Alliance Capital Mutual Fund, iterated the positive impact the tax cut would have on debt funds with lots of inflows coming into such schemes, though it would have no impact on equity funds. In the last six months, debt funds have seen 90 per cent inflows compared with equity schemes -- but most of this can be attributed to the lack of stability in the equity market.

The cut in rates in the administered prices, which is going to have an impact on the small savings rates as well as bank rates, has infused the sector with fresh hope that more money from the household sector will now be channalised into mutual funds.

In last year's budget, the government had increased the tax on distributable dividends and mutual funds from 10 per cent to 20 per cent, the effective tax rate going up to 22 per cent, though it was tax exempt at the hands of the investors.

The reduction in rates comes at a time when government security prices are rallying and the debt market is also on an uptrend. With the equities market being characteristically fickle, and investment options becoming narrower due to the all-round cut in rates (including bank rates), mutual funds and especially income funds hold out hopes of steadier and better returns.

Source: Business Standard

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