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Dividend Distribution Tax (DDT)- What You Should Know
July 05 , 2013

On any earnings that a resident of the country makes, they are supposed to pay a part of it as tax to the government. Some types of earnings have exemptions but on the rest we end up paying tax in one form or another. Dividend distribution tax (DDT) is paid by companies or mutual funds who give out dividends to shareholders or unit holders.

Understand what is dividend

There are two ways in which shareholders or unitholders in a mutual fund can make money. If value of the share or mutual fund unit (NAV) increases from when they bought it then they can make profit by selling it. This is earning by capital appreciation. Suppose you buy a fund at NAV Rs 150 and redeem it when it reaches NAV of Rs 175 then you have made profit of Rs 25 on each unit of the fund.

The second way of earning is of relevance to us now, that is if the company pays you part of its profit. Then you have earnings in the form of dividends. In case of mutual funds they pay out the returns as dividends. In shares return in terms of dividend need not match return through capital appreciation and vice versa, since a lot of other factors affect share prices besides profitability of the company. But in case of mutual funds, return of a fund's dividend option will be similar to return of the same fund's growth option.

Tax on dividend distribution- who pays

Shareholders and unitholders do not have to pay dividend distribution tax; they are exempt. The company or mutual fund has to pay this tax within 14 days of declaring dividend. But ultimately mutual funds deduct the tax amount from returns and pay out the rest to you so higher the DDT, lower your net returns.

Dividend distribution tax rate

Tax rules are framed by the government and it uses its autonomy to encourage or discourage certain economic behaviours through taxation.  Particularly in investments, equities always enjoy lenient treatment. Dividend distribution tax rates for 2013-14 on various products are tabulated below:

Product

Dividend distribution tax

Shares (delivery based)

17%

Shares (intra-day)

17%

Derivatives

-

Balanced Mutual Funds               

0%

All types of Equity Mutual Funds

0%

Liquid Mutual Funds

28.325%

All other Debt Mutual Funds, including Liquid Plus Funds; and Monthly Income Plans

28.325%

Gold Mutual Funds

28.325%

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