Mutual funds are subject to various taxes--dividend distribution tax, capital gains tax and securities transaction tax. How will the fund houses charge these taxes to the returns which the fund makes?
-N Rajesh
Let's look at the taxes that you have mentioned individually.
Dividend Distribution Tax: As the name suggests, this is a tax that is levied as and when the fund declares a dividend. However, only the debt-oriented funds have to pay the dividend distribution tax while the equity ones are exempt from it. The quantum of tax is 14.025 per cent of the amount of dividend (12.5 per cent tax + 10 per cent surcharge + 2 per cent cess). This tax is deducted by the fund house at the time of making the dividend payment. Often the funds declare a gross dividend and a net dividend. Gross dividend is the amount which is deducted from the corpus of the fund, while the net dividend is what an investor gets net of tax from this gross dividend. The ex-dividend NAV of the fund is declared after factoring in the dividend distribution tax.
Capital Gains Tax: Capital Gains tax is not charged by the fund house. It is paid by the investor directly to the tax authorities while filing the income tax return. Moreover, any capital gains arising from the equity oriented funds are exempt from tax if your holding period exceeds one year.
Securities Transaction Tax: Equity-oriented mutual funds are subject to securities transaction tax (STT) at the rate of 0.2 per cent at the time of selling the fund units. This charge is deducted when you redeem your investments.
This article was originally published on April 06, 2006.
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