Tax on Mutual Fund Dividends

In our previous article on Tax on Mutual Fund Returns, we discussed about how the returns on various fund schemes like equity, debt and ELSS are taxed. In this article we will elaborately discuss about how the tax on dividends earned from mutual funds, often referred as DDT (Dividend Distribution Tax) are charged. You must be aware that, there is no action that need to be taken from the investor’s end. As these dividends are already tax deducted before being credited to the investor’s bank accounts.

Tax on dividends from equity funds

As per the Budget 2018 in India, dividends earned from equity mutual funds are taxed at rate of 11.648 percent. This includes surcharge and cess and the tax is levied on dividends earned from mutual fund schemes that fall under equity category.

A DDT of 11.648 percent is applicable on dividends of all equity funds. 

Tax on dividends from Debt funds

Debt funds invest in fixed income schemes that offer guaranteed capital appreciation, such as Corporate and Government bonds, corporate debt securities, money market instruments etc. An Equity mutual fund is also categorized as a debt fund when the fund’s portfolio has less than 65 percent of its corpus invested in equity.

Dividends earned from debt mutual funds are subject to tax as well. The mutual fund house will credit the dividend to the investor after the tax is deducted. The fund house is responsible for paying tax on dividend returns. This tax is known as DDT (Dividend Distribution Tax).

A DDT of 29.12 percent is applicable on dividends of all non-equity funds such as money market, liquid and debt funds.

To be precise, the Dividend Distribution Tax in India as per Budget 2018 is taxed at 25 percent of the dividend plus  12 percent surcharge plus 4 percent cess. Thus the total tax levied on dividend before the investor gets credited is 29.12 percent.

DDT Calculation for Debt Funds Explained

Lets do some simple math to help explain the investors on how the tax on debt fund schemes’ dividend arrives to be 28.84%

SectionComponentCalculationTotal
ABase DDT25%25%
BSurcharge on DDT12% of Base DDT
12% of 25 = 3
3%
CCess3% of (Section A + Section B)
4% of  (25% + 3)

1.12%
DTotal DDT on Debt FundsTotal of section A +
Total of section B +
Total of section C
29.12%

We observe from the above table that the base DDT for debt funds is 25%. Surcharge of 12% on section A counts to 25+3 which is 28. Final cess of 4% on 28 is 1.12% thus counting to a total DDT Tax of 29.12 % for debt funds.

You must be aware that the DDT of 29.12% need not to be paid by the investor. Regardless of the mutual fund schemes, equity or debt, the dividends credited to the investors already undergo the tax deductions at the Mutual Fund House.

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