I have placed a part of the funds I received on retirement into three balanced funds, namely Kotak Balance, HDFC Prudence and SBI Magnum Balance for a span of five years or more. I have opted for the dividend-payout option. Recently I received dividends from the above mentioned funds. I want to know the tax liability on the dividends received. Also tell me the Income Tax implications on Debt Funds?
-Pankaj Sawney
The dividend income that you have received under the dividend payout option of the funds will not have any tax liability, since as per existing tax provisions, dividend income of mutual funds is tax free in the hands of the investor. In this case since all the three funds held by you are equity oriented funds, there will not be any tax liability on the dividend income received. So you can relax a bit!
However, this is not to say that there is no tax levied at all. In case of dividend on debt funds, the mutual fund company has to pay a dividend distribution tax of 12.5 per cent. This tax is paid out of the profits/reserves of the mutual fund scheme declaring the dividend. Therefore, though the investor may not feel the impact of the tax, it is indirectly borne by him only.
This article was originally published on July 02, 2008.
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