How Will Dividend Distribution Tax Affect Your Mutual Fund Portfolio?

By | February 14, 2018

The budget this year saw the introduction of a 10% Dividend Distribution Tax (DDT) in the case of equity instruments, such as equity Mutual Funds. Read on to know what should be your investment strategy now.

How Will Dividend Distribution Tax Affect Your Mutual Fund Portfolio?

In his Budget 2018 speech, Finance Minister Arun Jaitley proposed among other things, the introduction of a 10% Dividend Distribution Tax (DDT) in the case of equity instruments, such as equity mutual funds.

The proposed change is in order to provide a level playing field across growth and dividend-oriented schemes, by segueing with the Long Term Capital Gains Tax (LTCG) on equity.

Impact of the Tax

In short, the DDT is a tax levied by the fund house before releasing the dividend. While it may be 10% on paper, you should also keep in mind that there is the 12% surcharge and 4% cess, potentially taking it up to 12.942%.

This is expected to come into effect on April 1, 2018. You can expect fund houses to declare large dividends before March 31 to escape the immediate purview of the DDT.

Reconsider Investment Strategies

Nevertheless, if you are invested in a dividend plan at present, it may be prudent to change tack. If you don’t need the dividends, you are better advised to opt for the growth plan in a mutual fund. There, LTCG is imposed only at the time of redemption – and it is applicable only on gains greater than Rs. 1 Lakh in a financial year.

Debt Funds

The tax regime for Debt Mutual Funds is unchanged. Debt funds pay a DDT, and such was introduced to reduce the arbitrage between bank deposits and debt mutual funds. The tax incidence for such debt mutual funds is at 28.84%.

While this move overall will hit dividend seekers and/or senior citizens, it might make investors – current and future – gravitate to growth options of respective mutual funds, and keep their portfolio churn to a minimum. In any case, equity is a long-term product and the tried and tested ‘buy and hold’ strategy is expected to continue generating healthy returns for all investors oriented toward the long term.

BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for Credit Card, Personal Loan, Home Loan, Car Loan, and insurance.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Msn Mutual Funds Times UCN Yahoo

About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

Leave a Reply

Your email address will not be published. Required fields are marked *