The government has passed the finance bill in which it has hiked the surcharge on distribution of dividend in the debt funds. With this new revision, the dividend distribution tax (DDT) on debt funds has gone up by 52 bps i.e. from 28.32% to 28.84%. For corporates, the DDT will be 34.61% in debt funds.
Fund houses pay DDT for dividend income distributed by debt funds which is tax free in the hands of investors.
Earlier, Union Finance Minister Arun Jaitley had proposed to increase the surcharge by 2% from 10% to 12% on additional income-tax payable by fund houses on distribution of dividend. Hitherto, debt funds paid DDT of 25%+ 10% surcharge + 3% cess or 28.325% on gross basis when they distribute income to resident individuals. Now, after factoring in the hike in surcharge, DDT will increase to 28.84%.
Last year, Finance Minister had revised the computation method of DDT on gross basis which had increased the actual DDT payout by almost 5%.
Experts believes that the dividend payout option in debt mutual funds has certainly become less attractive.
Suresh Sadagopan of Ladder7 Wealth Advisories believes that opting for dividend payout option in debt funds doesn’t make sense for individuals irrespective of their tax bracket. “There is no point of opting for dividend payout option for an individual falling under 10% or 20% tax bracket. Similarly, it may not make much difference for individual falling under 30% tax bracket. It’s better to stick with growth option.”
