Tax on Income Distributed

Tax on Income Distributed

Mutual funds are investment vehicles that pool money from a large number of investors and invest in various financial instruments such as stocks, bonds, and money market instruments. When these mutual funds distribute the income earned from these investments to their investors, they are required to pay a tax on that income. This tax is known as a tax on income distributed under mutual funds or dividend distribution tax (DDT).

The dividend distribution tax is levied by the government of India on the dividend paid by mutual funds to their investors. This tax is deducted by the mutual fund before distributing the dividend to the investor. The current rate of DDT is 28.84%, which includes a basic tax rate of 25% plus a surcharge of 12% and an education cess of 4%.

The tax on income distributed under mutual funds is a way for the government to generate revenue and to discourage tax avoidance by investors who earn income through mutual funds. This tax is payable by the mutual fund and not the investor, and therefore, the tax liability is not borne by the investor. However, the mutual fund is required to deduct the tax at source before distributing the income to the investor. This tax is applicable to both resident and non-resident investors who invest in mutual funds in India.

Dividend distribution tax is the tax levied by the Government on companies according to the dividend paid to their investors.

Currently the dividend distribution tax is 25% (according to the Union Budget 2013).

As per existing tax provisions, income from dividends is tax free in the hands of the investor. Further the dividends from domestic companies are tax-exempt, dividend from foreign companies are taxable in hands of investor. On the contrary, there is a levy of 25% of the dividend declared as distribution tax. This tax is paid out of the profits/reserves of the company declaring the dividend. Additional surcharge of 5% on DDT and education cess of 2% is levied.