Budget 2014-15: Debt Mutual Fund Dividends Investors lose..!

 Budget 2014 – 15  saw a change in the methodology of calculating (dividend distribution tax)  DDT on debt mutuual funds, which means investors will lose out on dividends

In his budget, Finance Minister Mr. Arun Jaitly has changed the methodology of calculating dividend distribution tax (DDT) for all debt mutual funds including MIPs (Monthly Income Plans) and overseas funds.

This change will come into effect from October 1, 2014.

In the earlier scenario, if the debt mutual fund declared Rs. 100 as dividend, it used to make a provision for R.128.3, paying out R. 28.3 to the taxman & distributing the balance to the mutual fund investor.  This allowed the investor to pay less tax since the effective tax rate was 22.07%, and not 28.33% as mandated. (100/128.3 * 100 = 77.92%).

But the FM Mr. Arun Jailty has now disallowed such netting off & has asked funds to calculate the DDT on gross basis. Once the proposed changes are implemented, DDT will be calculated on gross amount set aside.  So, if the debt mutual fund has to pay Rs. 100 to the investor, it will have to first deduct DDT at 28.33 per cent and pay only the remaining.

Accordingly, the effective tax paid by investor will be  28.33 per cent. Hence, the debt mutualfund  investors will lose out to the extent of 6.26 per cent (28.33 %  -  22.07 %).

New Rule DDT DEBT Funds	Now	After October 1, 2014
Amount of Dividend Rs.	100	100
Rate of DDT %	28.33	28.33
Pay out to Investor Rs.	77.92	71.67
Amount of Tax Payout Rs.	22.08	28.33
Effective Rate of DDT %	22.08	28.33

This change of 6.26% points in DDT will affect the inflow in all debt mutual funds and will reduce the income of the mutual fund unit holder as the mutual fund will have to declare a lower dividend &  the unit holders will now get lower income.

Src: Value Research

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