Skip to main content
Dividend Distribution Tax

Dividend Distribution Tax

A mutual fund investor receives income in the form of dividends and capital appreciation. Fund Houses deduct tax and distribute the net income as dividends. Such tax is called the Dividend Distribution Tax (DDT).

DDT is payable over and above the income tax liability. No deduction or credit is allowed to the fund houses for DDT paid. Since the fund has already deducted the tax amount, dividends are tax-free in the hands of investors.

Equity Mutual Funds

DDT is payable at 10% on dividends from equity mutual funds as announced in Budget 2018.

Long term capital appreciation on mutual funds is taxable at 10% in the hands of investors. However, an annual tax exemption on long term capital gains up to INR 1 lakh is available.

Non-Equity Mutual Funds

Dividends from the money market, liquid and debt mutual funds are subject to DDT at 25%.

Long term capital gains on debt-oriented mutual funds get an indexation benefit and are taxable at 20%.

Note: Capital gains in mutual funds is a better way to plan your transactions in both equity and debt-oriented mutual funds.

Effective Rates of DDT

Type of Fund




Effective Rate

Equity-oriented funds





Non-equity oriented funds





Mutual fund schemes distribute dividends from the profits realised

  • by selling the securities in the portfolio at a price higher than the purchase price or
  • from the dividend or interest from the instruments held

Dividends are calculated as a percentage of the scheme’s face value and not the net asset value (NAV).


Growth Plans vs Dividend Income

Since dividends are subject to a higher rate of tax than capital gains, growth plans are a more tax-efficient option to invest. These plans reinvest the dividends realised from the securities in the fund portfolio. Such reinvestment increases NAV. 

If you are looking for regular payouts, growth plans may not be ideal. But it maximises the value of your investments and reduces your tax liability.

The Bottom Line

Thus, plan your investment with a longer time horizon. It will not just create wealth but also ensure tax-efficiency.

Happy Investing!

Add new comment

Plain text

  • No HTML tags allowed.
  • Lines and paragraphs break automatically.
  • Web page addresses and email addresses turn into links automatically.