Union Budget 2020 – How Will the Changes in Dividend Distribution Tax Impact Mutual Fund Investors?

Last Updated : Feb. 3, 2020, 11:08 a.m.

In the Union Budget 2020, the Finance Minister Nirmala Sitharaman has proposed to do away with Dividend Distribution Tax (DDT) completely. Instead, the government has shifted the burden of paying on dividends from companies and fund houses to investors.

Simply put, dividends accrued on equity funds and debt funds will now be taxed in the hands of investors. The dividend income will be added to the income of investors and taxed at marginal rate of taxation i.e. based on their income tax slabs. As a result, the effective tax rates for individuals in higher tax slab would go up to 33% as against 28.325% in debt funds and 11.648% in equity funds.

Also, for individuals having income between ₹50 lakh and ₹1 crore and investors having income of ₹1 crore and above have to pay more tax due to impact of surcharge.

Currently, many HNIs and ultra HNIs have invested in dividend options offered by mutual funds to avail benefits of lower effective tax rates.

What Do Experts Think About the Changes Made in DDT?

Vishal Kapoor, CEO, IDFC AMC feels that HNIs and ultra HNIs would move to growth options of mutual funds. He said that dividend option is no longer attractive for investors.

Mumbai IFA Vinod Jain of Jain Investment said that ultra HNIs would have to pay almost half of their dividend in tax. “Ultra HNIs may have to pay 43% tax on dividend due to higher surcharge.”

Seconding his views, Nilesh Shetty, Associate Fund Manager, Quantum Mutual Fund said, “The abolition of dividend distribution tax and shifting of taxability in the hands of dividend receivers may lead to significant tax increase for HNIs. Family-run companies may now prefer the buyback route for paying of dividends.”