Equity mutual funds to pay Dividend Distribution Tax of 10 per cent

Investors who bank on dividends from equity mutual funds to generate periodic income would be hit by the new budget proposal to tax dividends on equity mutual funds schemes. “I also propose to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10 per cent. This will provide level playing field across growth oriented funds and dividend distributing funds,” the finance minister said in his budget speech.

Currently, there is no dividend distribution tax or DDT on equity-oriented mutual fund schemes. The mutual fund schemes which invest at least 65 per cent of their assets in equities were out of the DDT ambit till now. However, debt mutual funds pay dividend distribution tax of 28.84 per cent (25 per cent tax + 12 per cent surcharge + 3 per cent cess ) .

But do investors need to worry about paying extra taxes? Experts say no. If you have invested in a mutual fund scheme under the dividend option, you don't have to pay any tax on dividends as they are exempt from income tax in the hands of the investor in both equity and a debt schemes.


However, from now, mutual fund houses will have to pay a Dividend Distribution Tax of 10 per cent on dividends declared under equity schemes. As said earlier, they already pay a DDT of 28.84 per cent on dividends declared under debt schemes.

Sure, DDT is paid by the mutual funds and not by investors. However, investors would be impacted as the company pays the tax out of the declared profits and it will debt the dividends to that extent.

The move is likely to hit some investors, especially retirees, badly. This category bank on dividends from equity schemes to generate periodic income. The proposal may have an adverse impact on balanced funds, as many retires invest in them under the dividend option to generate regular income.