I want to know the tax treatment of dividends received from mutual funds. Do we tax them as capital gains or interest income? Also, how is the income from FMPs with a maturity of more than three years taxed?
The dividend income that you receive from the fund is tax-free. However, Dividend Distribution Tax (DDT) is deducted from the dividends before they are provided to you. Earlier, only debt funds were liable to a DDT of around 28 per cent. But now, even equity funds are liable to a DDT of 10 per cent. So, if any equity fund gives you a dividend of 10 per cent, then Net Asset Value (NAV) is reduced by more than 10 per cent, that is, around 11 per cent. Therefore, it is not recommended to invest in the dividend plan of any mutual fund. In case of an FMP with a maturity period of more than 3 years, only gains are taxed at 20 per cent, that too, only after you receive the benefit of indexation.