16 replies on this article “Liquid Fund — Dividend Reinvestment option”

1. Kumud Taparia says:

   November 16, 2015 at 12:54 pm

   I agree with Mr. Ram Mohan. I also don’t understand as to why people suggest that “Go for Daily Dividend Reinvest option if you fall in 30% tax slab.”

   I understand that NAV being same, there would be no capital gain. However, the DDT, though lower than normal tax rate, would still be a sunk cost for which nothing can be done.

   Perhaps, people giving this suggestion ignore two possibilities : 1. If the funds remain for 3 years for any reason, you can save tax under growth option which is not possible under Dividend Reinvestment 2. Possibility of set off with short term capital loss exists under growth option but not under Dividend Reinvestment.

   Reply
   1. Manish Chauhan says:

      November 18, 2015 at 12:34 pm

      Hi Kumud Taparia

      Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also

      Manish

      Reply
2. Ram Mohan says:

   May 3, 2012 at 11:22 am

   @banyanfa — ok I get the “trick” now. Isn’t this possibly the same thing that is applicable in all dividend reinvestment options for other liquid funds?

   Another follow up question. Isn’t it a bit complex to calculate your actual profit in the dividend reinvestment scheme?

   I’ve decided to keep it simple by opting for growth option…

   Reply
   1. ashal jauhari says:

      May 13, 2012 at 8:57 am

      Dear Ram, the taxation part is discussed at lengths already hence not touching that. Regarding calculation of profit, it’s very simple. Say you started with 10000 units & due to Div. reinvestment, total units are 11000. Now the difference between purchase price of 10000 units & sell price of 11000 units is your profit adjusted for STCG/LTCG Tax if any.

      Thanks

      Ashal

      Reply
      1. Ram Mohan says:

         May 14, 2012 at 11:54 am

         Dear Ashal,

         I think from a taxation point of view, the cost of acquisition should be for 11,000 units rather than 10,000 units. The reinvestment is also considered as cost of purchase because for the reinvestment amount, tax has already been paid

         Thanks,

         Ram

         Reply
         1. ashal jauhari says:

            May 14, 2012 at 2:29 pm

            Dear Ram, you are focusing on taxation issue, I simply provide the profit calculation.

            Thanks

            Ashal

            Reply
3. BanyanFA says:

   May 1, 2012 at 1:27 pm

   Hi,
   You are indeed correct. Full details of the DDT and tax impact of Liquid funds can be found at http://insight.banyanfa.com/?p=690.

   If you are in 30% bracket, any short term investment which you make shall attract 30% TDS.

   Other option, which is much preferred for high earners is to invest into HDFC Cash management Fund – Treasury Advantage Plan. While this fund’s returns are almost like a liquid fund, its dividend doesn’t attract a 27% + DDT. DDT in this fund is just 15% and hence if you are in 30% tax bracket, you are reducing your tax liability from 30% to just 15% DDT. You can invest in this fund with Dividend Re-inv option.

   Regards
   BanyanFA

   Reply
   1. Muthu Krishnan V says:

      May 1, 2012 at 8:33 pm

      so this means if we have set-up a daily STP to any hdfc equity fund from hdfc debt fund, it would be advisable to set it up from hdfc cash management fund – treasury advantage plan – daily dividend reinvestment option (ultra short term) instead of HDFC Cash Mgmt Savings (liquid fund).

      This would be much more tax efficient?

      Reply
      1. BanyanFA says:

         May 2, 2012 at 6:28 pm

         Hi Muthu,
         My point is that you should not go for a Dividend Reinv option (whether daily, weekly or any other frequency) from HDFC Cash Management- Saving Plan as DDT would be deducted. If you want HDFC CMF – Saving, invest it in Growth Option and do a Daily STP into Equity plan.

         Regards
         BanyanFA

         Reply
         1. Muthu Krishnan V says:

            May 2, 2012 at 9:41 pm

            @BanyanFA,
            I agree with you. At present I have a STP from hdfc cash management fund (G) and hence I end up paying at STCG at 30%. It would be more efficient to set-up the STP from HDFC TAP – daily Dividend Reinvestment. The returns are more or less the same and the tax would be 13%+ instead of 30%. am I right?

            Reply
   2. Ram Mohan says:

      May 2, 2012 at 5:54 pm

      @BanyanFa

      I don’t understand how HDFC Treasury Advantage plan – Dividend Reinvestment scores over HDFC Treasury Advantage Plan – Growth. Assume that my holding period is 1 year plus so that I have to only pay Long Term Capital Gains Tax on the same

      Thanks,

      Ram

      Reply
      1. BanyanFA says:

         May 2, 2012 at 6:24 pm

         @ Ram Mohan.

         You are right, I am not advocating a Dividend Reinv for HDFC TAP if the holding period is more than 1 year. The entire discussion is for investment horizon upto 1 year. Before 1 year, a debt fund attracts STCG equivalent to the tax slab of the investor. Hence to summarise :

         Debt Fund – Short term – Go for HDFC TAP – Dividend Reinvest – applicable tax would be DDT
         Debt Fund – Long Term – Go for HDFC TAP – Growth option – applicable tax would be 10% without Indexation or 20% with Indexation.

         If the discussion is with regards to NRIs, then the above way of investing doesn’t hold good due to TDS implication. To avoid any confusion, I shall not detail that unless there are any NRIs who want this clarification.

         Regards
         BanyanFA

         Reply
         1. Ram Mohan says:

            May 2, 2012 at 10:35 pm

            @BanyanFa — I’m not sure I still understand how dividend reinvestment option helps in case of short term. Let’s say I sell the units before 1 year, I still get taxed at my tax bracket, right? The DDT tax @ 15% is only for the reinvestment, but when I liquidate, I still have to pay 30% (my tax bracket) for all units if it’s done within 1 year, right?

            I’m officially confused!

            Thanks,

            Ram

            Reply
            1. BanyanFA says:

               May 3, 2012 at 12:38 am

               Hi Ram,
               I love your last sentence “Officially Confused” 🙂

               The answer lies in a small maths. When ever the fund declares the Dividend, its NAV drops. The dividend amount is then re-invested at this rate. Hence over a period of time, your units increase, but the NAV doesn’t increase. Hence, when you sell, your cost of acquisition is almost equal to your sell price – generating almost no capital gain.

               Another alternative is to go for dividend option – in case you want to keep things simpler.

               Regards
               BanyanFA

               Reply
            2. justgrowmymoney says:

               May 3, 2012 at 11:46 am

               Check out “Where to Park Short Term Funds/Emergency Corpus” under http://justgrowmymoney.wordpress.com/downloads/. You will see why dividend reinvestment scores over growth option for up to 1 year

               Reply
4. wealthucreate says:

   May 1, 2012 at 11:48 am

   what was your idea when you opted for dividend re-investment? You are right DDT will eat away a portion of your profits. I guess you have an option to change it to growth.

   Give your fund time so that you are eligable for Long Term Capital gains.

   Reply

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