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Dividend Distribution Tax

Please explain dividend distribution tax. Is it a tax on the profits that mutual funds book? Do AMCs have to pay tax on the profits booked?
-Udai Mittal

Please explain dividend distribution tax. Is it a tax on the profits that mutual funds book? Though it is said to be tax-free in the hands of investors, do AMCs have to pay tax on the profits booked? Do the rules of this tax differ between nature of funds?
-Udai Mittal


Dividend distribution tax is the tax that is to be paid to Income Tax authorities by the entity declaring the dividend. Historically, the rules related to the taxation of dividends have kept changing from time to time.

Earlier, there was no dividend distribution tax charged from the person declaring the dividend, while the recipient of the dividend had to pay tax. But according to existing rules, the person declaring the dividend has to pay a dividend distribution tax, while it is exempt in the hands of recipient.

In case of mutual funds, except for the equity-oriented mutual funds, other types of funds have to pay a dividend distribution tax of 12.5 per cent (plus surcharge and cess). It is not a tax on the profits that mutual funds book.

However, please note that although an investor does not pay this tax himself, the burden ultimately falls upon him. This is because at the time of declaring the dividend, a mutual fund sets apart the amount to be paid as dividend distribution tax, and pays the balance amount as net dividend to the investors. Therefore, this tax amount is indirectly paid by investors.

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