Thread: Tax on Dividends paid by Mutual Funds

From 1st April,, 2020, the tax regime on Dividends paid by Mutual Funds has changed

This thread tells you these details and also whether you should choose the Dividend or Growth Option in MFs

(1/n)

First, what is the change

Earlier
Mutual fund dividends in hands of investor (you) were Tax-Free
MF was liable to pay DDT (Dividend Distribution Tax)

Now
Dividends are taxable in hands of investor i.e. You have to pay tax
MFs will not be liable to pay DDT

(2/n)

What more?
MFs will also deduct a TDS @10% from dividends paid

Hey but that is only if Dividend is > Rs. 5000/- in a FY

Technically correct, but most MFs will not be able to monitor this. So they will deduct TDS for everyone for any amount! Even if < Rs. 5000/-

(3/n)

So this is for Dividend paid to me. What if I am in Dividend Re-investment? That is my Dividend gets re-invested. I never get it

Even in Dividend Re-investment TDS will be deducted. For Tax purposes, Re-investment is considered as Dividend paid and again re-invested

(4/n)

For Equity Funds, Dividend is declared once in a year (or sometime more than that). But in Liquid Funds, I am in Daily Dividend Re-investment. What will happen here?

Again – on daily basis TDS will be deducted and balance dividend will be re-invested
@LakshmanaMadan

(5/n)

So for eg: in Liquid Bees? That is ETF

Yes, same as explained in Point 5 above. ETF is just another mutual fund.
@LakshmanaMadan

(6/n)

Q: So am paying more tax on MF Dividends, as I have to pay tax now?

Ans: It depends. Earlier MFs used to pay DDT @10% in equity MFs and 25% in case of debt MFs.

If u are in a higher tax slab then above mentioned rates,, effectively will pay higher tax. Otherwise lower
(7/n)

Q: Anything else?
U have to pay tax on Dividends = Income Tax Rate + Cess + Surcharge
Surcharge can be as high as 37% (Income > 5 cr)
But max surcharge on Dividends will be 15%
(Don’t get upset, I am just telling u technicality. I know most of us here don’t earn > 5 cr)
(8/n)

Q: Any difference for NRIs?
Ans: Yes, for NRIs TDS will be deducted at 20%

Q: Will MFs give me a TDS certificate for this?
Yes they are required to give

Q: Will it come in my 26AS automatically
Ans: Yes

(9/n)

Q: Can I give Form 15G/H for non-deduction of TDS as I give in Banks

Ans: Yes, you can give. You will have to give to each MF and at beginning of every year

(Cmon AMFI @amfiindia , make it simpler by taking only one form for all the MFs! Make paper work lower)
(10/n)

So Finally tell me is Dividend Option better or Growth Option in MFs?

For most people Growth option will be better

If u r in Dividend Options of MFs, change over to Growth - is the thumb rule

Do check basis ur tax slab, time horizon etc with ur tax advisor

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(11/n)