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A Taxing Challenge

The taxes applicable to an investor in MFs are simple to understand

How do fund houses charge the various kinds of taxes like dividend distribution tax (DDT), capital gains tax (CGT) and securities transaction tax (STT) that a fund is subject to? Are these taxes deducted from the returns the funds generate?

Let's look at the taxes that you have mentioned individually.

Dividend Distribution Tax: As the name suggests, this is a tax that is levied as and when the fund declares a dividend. However, only the debt-oriented funds have to pay DDT while the equity ones are exempt from it. The quantum of tax is 14.16 per cent of the amount of dividend (1.25 per cent tax + 10 per cent surcharge + 3 per cent cess).

This tax is deducted by the fund house at the time of making the dividend payment. Often the funds declare a gross dividend and a net dividend. Gross dividend is the amount which is deducted from the corpus of the fund, while the net dividend is what an investor gets net of tax. The ex-dividend NAV of the fund is declared after factoring in the DDT.

Capital Gains Tax: It is not charged by the fund house. It is paid by the investor directly to the tax authorities while filing income tax returns. Moreover, any capital gains arising from the equity-oriented funds are exempt from tax if your holding period exceeds one year.

Securities Transaction Tax: Equity-oriented mutual funds are subject to STT at the rate of 0.25 per cent at the time of selling fund units. This charge is deducted when you redeem your investments.

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