In the 2018 annual budget, Finance Minister ArunJaitley introduced dividend distribution tax for equity mutual funds.
The tax is imposed on income generated by the equity mutual funds at 10% ( totaling to 11.648% including the cess and surcharge).
The tax is imposed on the objective of balancing the income flow for growth and dividend options.
Because of this new addition, investors must revise their investment strategy to include different investment options other than equity. The newly proposed tax will significantly reduce the in-hand returns for the investors.
The funds house will likely deduct the DDT before issuing the investment dividends.
Due to this new development, investors are better off in investing in growth option of mutual funds for better returns and higher capital gains.
At present the dividends from all mutual funds are tax-free. But in the case of debt funds, the fund houses are supposed to pay DDT. This DDT was introduced to bridge the gap between fixed deposits and debt funds, in order to bring them to an equal ground.
According to the new DDT, mutual funds that invest less than 65% of total capital in equity are under non-equity funds.
DDT on all non-equity funds is 25%( totaling to 28.84% including the cess and surcharge).