DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free

The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free. It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.

The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R100, it used to make a provision for R128.3, paying R28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per cent, and not 28.33 per cent as mandated. (100/128.3 * 100 = 77.92%).

But the FM has now disallowed such netting off and has asked funds to calculate the DDT on the gross dividend amount. So, if the fund has to pay R100 to the investor, it will have to first deduct DDT at 28.33% and pay only the remaining. Accordingly, the effective DDT deducted is 28.33%.