Mutual Funds with PSU theme: Are they more attractive now?

Post the abolition of the Dividend Distribution Tax as announced in the Union Budget 2020, the possibility of funds with PSU themes performing well and rewarding investors has become better. Our study points out how this will happen

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The Union Budget 2020 presented by Finance Minister Nirmala Sitharaman was one of the longest in history but the sheer volume did not do much to cheer the equity market, driving home the point that words don’t really matter but action does. On the budget day, the frontline equity index, BSE Sensex, dropped almost 1,000 points. Nevertheless, in the following week it recovered most of its fall and went on to close on a week’s high of 41,141.85. The budget had nothing for retail investors from an investment perspective. The signal was clear – most of the expectations were not met! However, the budget did propose to abolish Dividend Distribution Tax (DDT).

This might be a good news for some and bad news for others. DDT is bad news for people falling in the higher tax bracket as the dividend earned would be added to an individual’s income and be taxed as per the Income Tax slab rates. That being said, it would be good news for those in the lower tax bracket. Previously, any domestic company that was distributing dividend was required to pay DDT at the rate of 15 per cent on the gross amount of dividend as mandated under Section 115 O of the Income Tax Act 1961. Therefore, the effective rate of DDT becomes 17.65 per cent, excluding any surcharge and cess on the amount of dividend.

Case Study