I have two questions. First I would like to know whether pensioners are eligible for standard deduction? And how is the monthly dividend from mutual funds taxed?
- Anonymous
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Yes, pensioners are also entitled to standard deduction. According to the latest budget (2018), anyone with a taxable income of up to Rs 5 lakh has been completely exempted from paying any tax. There is no change in the tax slab. However, if your taxable income does not exceed Rs 5 lakh, you are entitled to a full rebate.
With regard to your second question, dividends from all mutual funds are now taxable. Earlier, dividends only from debt funds were taxable. But now, the dividends from equity funds are taxable as well. At present, all dividends are subject to Dividend Distribution Tax even before they are passed to you. So, effectively, you are indirectly taxed.
For example, if an equity fund is giving a dividend of 10 rupees, you will actually get 9 rupees because the dividend distribution tax is deducted before you get the amount. It is effectively your cost. Likewise, in debt funds, the dividend distribution tax is deducted beforehand.
It is always good to opt for a systematic withdrawal plan (SWP) instead of going for a dividend option. We are psychologically configured to feel happy when we get a dividend. We have this comfort or notion that dividend means that my investments are doing okay. In the case of mutual funds, it doesn't matter. If you invest today and tomorrow it gives a dividend, it is basically giving your money back. It is not necessarily a signal of your investment's performance. So, earning in the form of systematic withdrawal serves the purpose.
Just decide the type of withdrawal rate that you should follow. Generally, a conservative withdrawal rate should be somewhere around 5-7 per cent. So, if you invest one lakh, you should derive not more than Rs 5,000 to Rs 7,000 divided by 12 months. And it will ensure that the value of your investment doesn't go substantially down and revise this withdrawal rate every year.