Smart things to know: SWP instead of dividend option

1 - The dividend option in debt funds is subject to dividend distribution tax (DDT). From 1 June 2012, individual investors are subject to 25% DDT on all debt funds.

2 - DDT is levied on all investors and paid directly to the government. Investors cannot claim a refund for the DDT deducted before paying them dividends.

3 - If the investor's marginal rate of tax is less than 25%, choosing the dividend payout or reinvestment option will result in lower posttax return.

4 - Such investors can choose the growth option instead of the dividend one. They can set up a systematic withdrawal plan (SWP) that redeems a few units and pays them the income they need.

5 - The redemption is subject to marginal rate of tax, if made within one year. A monthly SWP will generate a better level of income for them than dividend reduced by the DDT.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre and Arti Bhargava.)