Growth Mutual Fund vs Dividend Mutual Fund: Which is better option for investors

It is very difficult to give a ready-made answer and the answer to your question would depend on your present income tax slabs and the composition of your income. Since the dividends are fully taxable in the hands of taxpayers, it would make sense for you to opt for the dividend option in case your total taxable income does not exceed Rs. 5 lakhs under the old tax regime and ₹7 lakh under the new tax regime for which you can claim rebate under Section 87A effectively making the dividends tax-free in your hands. 

However, in case your total taxable income exceeds the threshold under the respective tax regime, you will have to pay tax from the initial tax exemption limit on your dividends. In case you opt for the growth option, the short-term capital gains on the equity scheme would get taxed at a flat 15% whereas long-term capital gains on equity schemes will get taxed at a flat rate of 10% beyond the initial exemption of one lakhs. In case you have invested in debt schemes the short-term gains will be taxed like your dividend income but for long-term capital gains you will get the benefit of indexation and a flat rate of 20% will apply on long-term capital gains after reducing the indexed cost from the redemption value. Take the help of your tax advisor to help you decide on this matter.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his Twitter handle.

Updated: 24 Jun 2023, 07:41 AM IST