Mutual Fund Dividend Tax

What is the first thing, which comes to your mind when you think about making an investment?

The Return, it will fetch you!

However, is that the only thing you consider? I am sure not. There are many other things, which must be pondered upon, before making any investment decision. Tax implications are one of them.

Here in the next few paragraphs, we’ll do some talking on the current tax provisions that mutual funds (the most common investment avenue among retail investors like us) are subject to.

There are thousands of MF schemes available in the market for you to invest, depending upon your risk appetite and goals. However, when it comes to understanding of tax implications, it leaves a retail investor in a state of confusion. In this article, we’ll try to present these provisions in a simple manner. Tax liability in case of investments in MF’s may occur in the following circumstances:

Dividend / Income distributed by the scheme

Capital gain / loss from the redemption of MF units

We’ll focus on mutual fund dividend tax there.

Dividend / Income Distributed by the Scheme

Income received from units of a mutual fund registered with the Securities and Exchange Board of India (SEBI) is exempt in the hands of the unit holder. However, the scheme is liable to pay dividend distribution tax (DDT) at the following rates:

Dividend Distribution Tax (Payable by the scheme)
	Resident Individual/HUF	DomesticCorporates	NRI
Equity Oriented Schemes	Nil	Nil	Nil
Money Market Schemes	25%+ 10%Surcharge + 3%Cess	30%+ 10%Surcharge + 3%Cess	25%+ 10%Surcharge + 3%Cess
	= 28.325%	= 33.99%	= 28.325%
Other than equity oriented schemes	Up to May 31, 2013
	12.5%+ 10% Surcharge+ 3% Cess	30%+ 10% Surcharge + 3%Cess	12.5%+ 10% Surcharge+ 3% Cess
	= 14.1625%	= 33.99%	= 14.1625%
	Applicable from June 1, 2013
	25%+ 10%Surcharge + 3%Cess	30%+ 10%Surcharge + 3%Cess	25%+ 10%Surcharge + 3%Cess
	= 28.325%	= 33.99%	= 28.325%

Hence, the dividend you receive from your MF units is tax – free in your hands. You do not need to pay any tax on the same; the scheme does, if it is not an equity-oriented scheme.

Exciting, isn’t it? You get a tax – free income if you invest in mutual fund schemes.

Think again!

The tax is paid by the fund from its resources and it influences the unit holders indirectly. The effect is reflected in the scheme’s NAV, which gets reduced by the amount of tax paid. In the long term, the income distribution tax substantially affects the value of investments. So, even if you are not paying the tax directly, it is somewhere being deducted on your earnings only.

The fact doesn’t mean that MF schemes are not beneficial when it comes to taxability, besides offering tax – free dividend in the hands of investors, there is a huge tax advantage there as well – capital gain tax benefit. Therefore, next time when you are planning to invest in any MF scheme, look at all the aspects together, including taxability, and then take a call.