SEBI Circular

FREQUENTLY ASKED QUESTIONS (“FAQ”) ON INCOME DISTRIBUTED UNDER DIVIDEND OPTION OF MUTUAL FUND SCHEMES (HEREINAFTER REFERRED TO AS “DIVIDENDS”) ON OR AFTER APRIL 1, 2021

Ref: SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2020/194 dated October 05, 2020 on Review of Dividend option/plans in Mutual Fund Schemes.

Q.1.        What changes are being introduced in respect of dividend option of Mutual Fund Schemes in the above SEBI Circular ?

Ans.       As per the abovementioned SEBI Circular, whenever distributable surplus is distributed under Dividend Plan, the AMCs are required to clearly segregate and disclose (i) income distribution (appreciation in NAV) and (ii) capital distribution (Equalisation Reserve) in the Consolidated Account Statement (CAS) provided to the investors.

 

SEBI has also stipulated that all the existing and proposed Schemes of Mutual Funds shall name / rename the Dividend option(s) in the following manner:

  Option / Plan (existing)                 New nomenclature

Dividend Payout	Payout of Income Distribution cum capital withdrawal option
Dividend Re-investment	Reinvestment of Income Distribution cum capital withdrawal option
Dividend Transfer Plan	Transfer of Income Distribution cum capital withdrawal plan

 

Q. 2.     What is the purpose of the above regulatory directive?

Ans.       The regulatory intent of the regulatory directive is to clearly communicate to the investors that, under Dividend Option of a Mutual Fund Scheme, certain portion of the capital (Equalization Reserve) can be distributed as dividend. Accordingly, SEBI circular requires Mutual Funds to rename Dividend option(s) as per the above table.

Q.     3. What is the effective date for implementation of the above change?

Ans.       The above provisions are effective from April 1, 2021 for income distributed under ‘Dividends Option/Plan’ of a mutual fund scheme wherein the Record Date falls on or after Apr 1, 2021.

Q.     4.    What about the break-up of dividend distribution made in the past?

Ans.       The aforesaid disclosure of break-up of dividend distribution shall be only for dividends declared on or after April 1, 2021 and not for dividends declared prior to Apr 1, 2021.

Q. 5.       Are there any income-tax implications for the mutual fund investors due to the above regulatory provisions?

Ans.           Currently, dividends distributed by a mutual fund are taxable in the hands of investors as per applicable tax rates. There is no further guidance available on the impact, if any, of the revised disclosures on taxation in the hands of investors. Investors should consult with their tax advisors for any further questions related to tax.

Q.     6.        Would there be any changes in the calculations in the capital gains statement?

Ans.           The aforesaid disclosure of break-up of dividend distribution shall be only for dividends declared on or after April 1, 2021 and not for dividends declared prior to Apr 1, 2021.

Q. 7.           .Would there be any changes with respect to TDS on dividends?

Ans.           No. There will be no changes and TDS on dividends would continue to be deducted on the entire sum distributed, as done currently. Refer response to FAQ 6 above.

Q. 8.           What should be the Scheme name on the cheque/DD for purchase transactions under the dividend option / plan?

Ans.           In case the full name of the scheme including the option is written on the cheque / DD, then the new naming convention should be followed. i.e., ABC Mutual Fund - Regular - Weekly IDCW.

 

Investors are advised to refer to the instructions in this regard in respective Scheme Information Document (SID) or Key Information Memorandum (KIM) on the website of the concerned mutual fund or contact their investment adviser / MF distributor or the concerned AMC in case of any queries in this regard.

Q. 9.       .What is the implication on the cost in case of transmission/Scheme Merger/Segregated portfolio – What is considered as cost?

Ans.       There will be no change in cost in case of transmission/Scheme Merger/Segregated portfolio

Q.     10. How will the above naming convention be reflected in the CAS and MF Account statements?

Ans.       As per the abovementioned SEBI Circular, whenever distributable surplus is distributed under Dividend Plan, the AMCs are required to clearly segregate and disclose (i) income

Q. 10.    distribution (appreciation in NAV) and (ii) capital distribution (Equalisation Reserve) in the Consolidated Account Statement (CAS) provided to the investors.

Ans.       SEBI has also stipulated that all the existing and proposed Schemes of Mutual Funds shall name / rename the Dividend option(s) in the following manner:

  Option / Plan (existing)         New nomenclature

Dividend Payout	Payout of Income Distribution cum capital withdrawal option
Dividend Re-investment	Reinvestment of Income Distribution cum capital withdrawal option
Dividend Transfer Plan	Transfer of Income Distribution cum capital withdrawal plan