With the dividend distribution tax now uniform across debt fund, here is what investors need to know

1. Despite DDT, debt funds better than FDs
With the dividend distribution tax now uniform across debt fund, here is what investors need to
know.
Author : iFast Content Team
In the last Budget, the Finance Minister proposed to increase the Dividend Distribution Tax
(DDT) for retail investors in debt mutual funds from 12.5% to 25%. Initially, just liquid funds
were in the 25% bracket.
This hike will now provide uniform taxation for all types of debt funds. Starting June 1, 2013, for
individuals and Hindu Undivided Families (HUFs), the DDT for all debt funds is 25%.
The surcharge on DDT for all mutual fund schemes has gone up from 5% to 10%. Accounting for
the latter, the DDT on liquid funds will now be 28.32% for retail investors.
Despite the increase in the DDT, dividend plans of debt schemes are still attractive for investors
who fall under the highest tax slab of 30%. They still give higher post-tax returns than similar
products such as bank fixed deposits.
For those who opt for a growth option and invest their money for more than a year, the tax is
10% without indexation or 20% with indexation. Short-term capital gains are taxed as per the
investor’s taxable slab.
Withdrawals after a year of holding:
Fixed Deposits Debt Mutual Funds
Growth Dividend
Assumed rate of return
from the investment
9% pa 9% pa 9% pa
Income tax rate 30.90% 10.3% NA
DDT NA NA 28.33%
Effective post tax yields 6.22% 8.07% 6.45%
According to this calculation by Mirae Asset Mutual Fund, the Dividend Reinvestment Option is
also better than Growth option in Debt Mutual Funds if the units are redeemed before 1 year.
Liquid Scheme Reinvestment / Payout Growth
Investment 1 lakh 1 lakh
Total return @5% 5,000 5,000
Dividend declared @4% 4,000 Nil
Dividend in investor’s hand 3,117 Nil
DDT (on 3,117 @28.32%) 883 Nil
Capital appreciation 1,000 5,000
STCG @33.99% 340 1,700
Therefore, individuals opting for the dividend option will get Rs 3,777 (3117 + 1000 - 340) and
investors who are opting for the growth option will get Rs 3,300 (5000 - 1700).

2. Incidentally, fund houses pay DDT on the distributed income and the dividends are tax free in
the hands of investors.
Related reading:
 SIP works for debt too
 3 must-know concepts about debt funds
 How to position an ultra short-term fund work for you
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