Growth vs. Dividend – Which Should You Choose?- Mutual Funds for NRIs

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Mutual fund investment is puzzling, particularly for NRIs. Do you opt for the Growth, Dividend Payout, or Dividend Reinvestment option? Don’t fret! In this blog, we will explain it in simpler terms for you, so you can make the most suitable choice for yourself.

1. Understanding the Growth Option

The Growth option is about creating long-term wealth. Rather than being paid dividends regularly, any earnings your mutual fund generates are paid back into the fund. In the long run, this helps your money grow and compound more quickly.

Real-Life Example:

If you invest ₹10 lakhs in a mutual fund earning a 12% return each year, it will become ₹11.2 lakhs in one year. Rather than having that ₹1.2 lakh gain in your bank account, it remains invested and earns further in the second year. For a 10-year period, this can prove to be quite substantial!

Tax Benefits for NRIs:

The Growth option is tax-friendly for NRIs because you’re only charged when you redeem your units, not on an annual basis. That reduces paperwork and no annual tax payouts on your incomes. Secondly, since 2024, capital gains on equity mutual funds are levied at 10% for long-term investments (one-year and above), so it’s a better option for long-term investors.

2. Investigating the Dividend Payout Option

The Dividend Payout facility offers steady income to investors through the distribution of profits. NRIs requiring constant income may like this. The dividends are credited in your NRE or NRO account. Dividends, however, are not assured and based on the performance of the fund.

Tax Implications for NRIs

One major point to mention is that NRIs’ dividends are liable to a 20% TDS in India, which may be more with the imposition of surcharge and cess as applicable. Regrettably, NRIs cannot file Form 15G or 15H to reduce the TDS rate.

3. The Hybrid: Dividend Reinvestment

Dividend Reinvestment is a combination of both worlds. The fund pays dividends, but rather than paying them to you, it reinvests them automatically by purchasing additional units of the same mutual fund.

The Catch:

While you’re reinvesting your dividends, the taxation is the same as the Dividend Payout option. You’re taxed on the dividends despite not getting the cash. That reduces it as tax-efficient relative to the Growth option.

4. Growth or Dividend Payout: How Do You Make Your Choice?

Select the Growth Option if:

• You don’t require regular income.
• You are saving for the long term such as retirement.
• You wish to make the most of compounding.
• You want a more tax-effective strategy.

Select the Dividend Payout Option if:

• You require a consistent income stream.
• You’re close to retirement or already retired.
• You’re willing to pay taxes on periodic dividends.

For most investors, particularly those in the accumulation stage, the Growth option will generally provide superior long-term outcomes.

5. Can You Switch Between These Options?

Yes! One of the best features of mutual funds is that you’re not locked into a single option forever. Many NRIs start with the Growth option during their earning years and switch to the Dividend Payout option upon retirement when they need regular income.

Conclusion: Let Prime Wealth Guide Your NRI Investments

Selecting the most appropriate mutual fund choice is based on your individual financial objectives and requirements. If you are concerned with long-term growth or income on a regular basis, you need to be aware of the tax implications and advantages. For professional advice, Prime Wealth has expertise in guiding NRIs through their investments, making your wealth increase while being compliant with overseas tax laws. Get in touch with us today to find out how we can help you with customized financial planning!

FAQs’

1. What is the main difference between Growth and Dividend options?

   Ans- Growth option reinvests profits for compounding, while Dividend option pays out profits as dividends.

2. Are dividends guaranteed in the Dividend Payout option?

   Ans- No, dividends depend on the mutual fund’s performance and are not guaranteed.

3. What is the TDS rate on dividends for NRIs?

   Ans- TDS on dividends for NRIs is 20%, plus any applicable surcharge and cess.

4. Can NRIs submit Form 15G or 15H to lower TDS?

   Ans- No, NRIs cannot submit these forms. They are only for Indian residents.

5. Which option is more tax-efficient for NRIs?

   Ans- The Growth option is typically more tax-efficient as taxes are only paid when selling the units.

6. What happens if I choose the Dividend Reinvestment option?

   Ans- The dividends are reinvested, but you still have to pay taxes on the declared dividend amount.

7. Can I switch between Growth and Dividend options later?

   Ans- Yes, you can switch between options based on your financial needs.

8. Is there a tax benefit for returning NRIs with dividends?

   Ans- Yes, returning NRIs can receive up to ₹12 lakhs in dividends tax-free under the new proposed tax slabs.

9. Which option is better for long-term wealth creation?

   Ans- The Growth option is generally better for long-term wealth creation due to the power of compounding.

10. What should I consider before choosing an option?

    Ans- Consider your income needs, tax situation, and long-term financial goals.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.