Despite DDT, debt funds better than FDsWith the dividend distribution tax now uniform across debt fund, here is what investors need toknow.Author : iFast Content TeamIn the last Budget, the Finance Minister proposed to increase the Dividend Distribution Tax(DDT) for retail investors in debt mutual funds from 12.5% to 25%. Initially, just liquid fundswere in the 25% bracket.This hike will now provide uniform taxation for all types of debt funds. Starting June 1, 2013, forindividuals and Hindu Undivided Families (HUFs), the DDT for all debt funds is 25%.The surcharge on DDT for all mutual fund schemes has gone up from 5% to 10%. Accounting forthe latter, the DDT on liquid funds will now be 28.32% for retail investors.Despite the increase in the DDT, dividend plans of debt schemes are still attractive for investorswho fall under the highest tax slab of 30%. They still give higher post-tax returns than similarproducts such as bank fixed deposits.For those who opt for a growth option and invest their money for more than a year, the tax is10% without indexation or 20% with indexation. Short-term capital gains are taxed as per theinvestor’s taxable slab.Withdrawals after a year of holding:Fixed Deposits Debt Mutual FundsGrowth DividendAssumed rate of returnfrom the investment9% pa 9% pa 9% paIncome tax rate 30.90% 10.3% NADDT NA NA 28.33%Effective post tax yields 6.22% 8.07% 6.45%According to this calculation by Mirae Asset Mutual Fund, the Dividend Reinvestment Option isalso better than Growth option in Debt Mutual Funds if the units are redeemed before 1 year.Liquid Scheme Reinvestment / Payout GrowthInvestment 1 lakh 1 lakhTotal return @5% 5,000 5,000Dividend declared @4% 4,000 NilDividend in investor’s hand 3,117 NilDDT (on 3,117 @28.32%) 883 NilCapital appreciation 1,000 5,000STCG @33.99% 340 1,700Therefore, individuals opting for the dividend option will get Rs 3,777 (3117 + 1000 - 340) andinvestors who are opting for the growth option will get Rs 3,300 (5000 - 1700).
Incidentally, fund houses pay DDT on the distributed income and the dividends are tax free inthe hands of investors.Related reading: SIP works for debt too 3 must-know concepts about debt funds How to position an ultra short-term fund work for youBy investing via Fundsupermart, you have access to 41 AMCs in India. Heres why you shouldinvest via Fundsupermart.com.At no cost to you, the Fundsupermart Mobile Application helps you take charge of yourportfolio with up-to-date information at your fingertipsTo buy and sell mutual funds online, click here.Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual fundsof any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or bematerially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or saleof any mutual fund. No investment decision should be taken without first viewing a mutual funds scheme information documentincluding statement of additional information. Any advice herein is made on a general basis and does not take into account thespecific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, andlegal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative ofthe future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise.Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website. Please read ourdisclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is noguarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAVof the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Pastperformance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of theScheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement ofAdditional Information and Scheme Information Document carefully before investing.