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Dividend Distribution Tax!

Authored On: 09-Jun-15

Last Modified: 09-Jun-15

      About. . .

 

Article details about Dividend Distribution Tax that Mutual Funds have to pay on dividend being distributed to unit holders. Article adds awareness of this tax, latest changes in it and suggests alternate options to increase fund returns in the context of this tax.

  • Non-equity mutual funds have to pay a tax on amount that it is distributing at dividend

  • Even though the dividend itself, when received by unit holders is tax free, before dividend is distributed, the mutual fund has to pay tax on amount being distributed.

  • This dividend distribution tax is 25% in current scenario. Surcharge and cess is added to this. 

  • Following figure explains the scenarios.

Equity Mutual Fund

Hybrid Fund - Mix of Equity and Debt

Debt or Other Types of Mutual Fund

  • With Equity always greater than 65% and hence classified as Equity Fund from taxation angle

  • Have no Dividend Distribution Tax!!

  • With Equity less than 65%, hence classified as Debt Funds

  • Fund has to pay Dividend Distribution Tax

  • See how it works out and its effects on your dividend paid and fund returns

  • Fund decides and calculate total dividend to be distributed. Say it comes to around Rs. 10,000 for your folio as per total units of yours and rate of dividend

  • However, before distribution of dividend to unit holders, mutual fund has to pay Dividend Distribution Tax

  • At current rates, that is 25% of dividend that is decided to be distributed.

  • Surcharge and cess are applied as well.

  • Effective net dividend post DDT to be distributed to the unit holders thus reduces to the extent of tax paid

  • This net dividend received by individual unit holders is tax free though

  • To protect the returns from these mutual funds, investor should opt for Growth option instead of Dividend option of scheme

  • As the Growth option does not pay dividend, reduction of return by virtue of payment of DDT will not arise

  • Also, investors will get benefits of indexation, if units are held longer till they become qualified for long term capital gains 

  • Also, there is additional benefit of adjustment of capital gains with capital loss, subject to other taxation allowance 

   Summary Lines:

  • Paying all applicable taxes for an individual is of utmost importance. However, investors can be smarter in knowing details on taxes to get higher return on their incomes.

 

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