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Pension Fund Dividends

Is dividend distribution tax applicable to pension funds?
-Prakash Shenoy

Dividend distribution tax is not applicable on equity funds, i.e., all those funds, which invest over 50 per cent of their total assets in equities. These include all equity funds and equity-oriented hybrid funds. But pension funds are debt-oriented hybrid funds as their equity exposure is limited to 40 per cent. Thus, the dividend distribution tax @ 12.5 per cent (plus surcharge) will be applicable on the dividends paid by pension funds for individual investors.

There are currently two such funds in operation in India - Templeton India Pension Plan and UTI Retirement Benefit Plan. Both these funds have confined their equity allocation to below 50 per cent of the total assets. And both offer dividend plans.

One should not be too much worried over the dividend distribution tax as these funds are meant to fulfill your post-retirement needs. Hence, opting for growth plan is the desired way to go about investing here. Moreover, investments of up to Rs 70,000 in pension funds every year are liable for tax benefit under Section 88 of the Income Tax Act, 1961.

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