With dividends on income funds now taxable, investors are advised to switch over from the dividend option of the scheme to the growth option. But should they be switching right now? That would not be a very smart thing.

Post-budget, dividends will be taxable depending on the investorÂ’s tax bracket (10%, 20% or 30%). However, should the investor choose the growth option stays invested for more than a year he will have to pay long term capital gains tax at 10% or 20% depending on whether or not he avails of indexation benefit.

But the moot point is should the investor in the dividend plan switchover to the growth plan. But first lets understand the implications of switch.

Will there be any load?
Switching from a dividend option of a scheme to a growth option of the same scheme will not attract any exit or entry load. So investors planning to switch don’t have to worry about the entry/exit loads. e.g. ‘A’ has invested in Templeton India Income fund (TIIF)’ quarterly dividend option which charges an exit load of 0.5%, if the investor redeems within 6 months from the date of investment. ‘A’ had invested in this fund on November 1, 2001, he can switch from the dividend option to the growth option of the scheme without bearing an exit load. However, the switch will entail capital loss as it is considered an exit from one investment option and an entry into another investment option.

When is the right time to switch?
Income funds with the quarterly and monthly dividend option are going to declare dividends over the next few weeks before April 1, 2002. The dividends, which will be declared, are still tax free in the hands of investor. So take the dividend which will be tax-free and the dividends could be significant as income and gilts funds have performed exceedingly well in this quarter.

What are the capital gains/loss implications?
Post-dividends, the dividend plan NAV (net asset value) of the fund will fall and if you exit the fund at the ex-dividend NAV, you can book a capital loss, provided you have been with the fund for 3 months before or after the dividend declaration. Even if you don't exit the fund but only switch options (from dividend to growth), you can still book a capital loss provided you have fulfilled the requisite 3 month obligation mentioned above.

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