An Index Fund repays investors any dividends or interests earned by the individual investments in the portfolio after reducing the fund’s expenses. However, the amount, timing, and dividend tax implications depend on the type of fund and the specific tax situation. In extreme cases, if the stocks from high-growth companies get reinvested into the business, they pay no dividends at all.
Index Funds are Mutual Funds or Exchange-Traded Funds tracking the returns of a market index that tracks the performance of a basket of securities, usually stocks or bonds. The securities combine for the investor into a single holding, making diversification quicker and easier.
Dividend payments
When you invest in Index Funds, you receive dividends. You can use these for wealth creation over the long term. Conversely, when the fund holds a security that does not pay dividends, it will not have dividends to pay its shareholders. They are a pass-through from the companies that pay them to the fund and, finally, to the investors.
Procedure
AMCs or fund houses pay you dividends through cash or reinvestment. The cash gets deposited in your Brokerage Account where you hold the fund. Under dividend reinvestment, you instruct your broker to pay the dividend with additional shares of the fund that paid the dividend.
Is it taxable?
Whether you make your dividends in cash or instruct your broker to reinvest them, they are considered taxable income. Everyone’s tax situation and bracket vary. Therefore, consult your taxation expert for advice on how to invest in Index Funds. You can also clarify whether to invest in SIP or lumpsum according to your financial goals and risk appetite. The following are its types:
Final dividend
You receive the final dividend after the end of a financial year. A financial year stretches from April 1 of one year to March 31 of the succeeding year.
Interim dividend
The interim dividend is declared and paid during a financial year. It is done before the company’s accounts for that financial year are finalised.
TDS on dividend income in India
The company or the Mutual Fund house that pays your dividends is responsible for deducting TDS from the dividend amount before payment. The rates of TDS on dividends also differ according to your residential status. If the dividend income exceeds Rs. 5,000, the TDS gets deducted 10% for resident Indians.
Important points
Since the dividends earned on investments are not tax-free, they get taxed at the same rate as the income tax slab. If you choose your Mutual Funds and stocks well, you can set up extra income with just equity dividends. These are some of the benefits of Index Funds.
Conclusion
When you earn money through dividends, you can use it periodically to invest in a tax-saving instrument to maximise your earnings, savings, and tax benefits in one go.
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