Taxation of Investments in Liquid Funds

I want to know the tax implication of short term and long term capital gains for investments in dividend reinvestment option of a liquid fund.
-AR Haider

For individual investors the dividends from liquid fund are subjected to Dividend Distribution Tax (DDT) of 28.325 per cent (including 10 per cent surcharge and 3 per cent education cess). However, these dividends are tax-free in the hands of investors because the AMC deducts the same before distributing gains.

In case of the dividend reinvestment option, dividend will be reinvested in the scheme after deducting DDT. Dividends reinvested will be treated like fresh investment and the withdrawals will be taxed according to the tenure of investments.

If you withdraw your investments before completing one year, gains will be treated as short-term capital gains and added to your income. These would be taxed as per your tax slab.

Investments withdrawn after a year attract long-term capital gains tax. These are taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower.

This article was originally published on August 30, 2013.