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The dividend distribution tax (DDT) is an invisible tax that many investors pay without even knowing. It is levied on dividends paid by mutual fund schemes other than equity funds and equity-oriented balanced schemes.For all other schemes, fund houses deduct a DDT of 28.33%.

 

Many investors, especially senior citizens who have opted for the dividend option of monthly income plans or debt funds, don't even know that they are paying DDT.They may not be in the tax net but pay a 28.33% tax on the dividend income from their mutual fund investments.

Instead of dividends, one should go for the growth option in non-equity funds. If you are looking for a regular monthly or quarterly income, start a systematic withdrawal plan (SWP). A predetermined amount is redeemed on the day of the month fixed by you. If you are looking for a lump sum, just redeem the amount when the need arises.

The growth option is more tax-efficient because unlike in the dividend option, the entire sum is not taxed. Only the capital gain is taxable. So, if you bought the fund when the NAV was `12 and sold it when it was `15, the tax will only be on `3 per unit. In the first three years, this `3 will be added to your income and taxed at normal rates. As we explained earlier, after three years, the gain is eligible for indexation. In recent years, high inflation has reduced the capital gains tax to almost nil.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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