How does DDT affect my investments?

A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.

Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.

The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.

How does DDT affect my investments?

Before April 2020, mutual fund dividends were tax-free in the hands of investors, i.e. they did not have to pay income tax on dividends of their mutual fund investments. The house of the fund would deduct dividend distribution tax (DDT) from the distributable surplus (profit) of the fund to calculate the distributable net surplus. This amount was distributed in proportion to the shares held in the fund by all investors who had opted for the dividend option.

Now, mutual
funds do not need to deduct DDT at source, but the investor is required to pay income tax on mutual fund dividends according to his highest income tax plate. While in the DDT regime, a uniform tax rate had an impact on investors who had opted for the dividend option, now the impact of dividend income tax will vary from investor to investor. An investor in the 30% income tax plate will see a higher dividend tax than someone in a 20% tax plate.

Previously, the investor of the growth option was not affected by DDT as the profits made by the fund were reinvested to grow the fund’s capital base. Thus, an investor in the growth scheme saw an increase in the NAV of its shares while continuing to hold the same number of units while a dividend option investor experienced a decline in the NAV after the dividend declaration.

With the abolition of the dividend tax on mutual funds, both the Growth and dividend options will now experience the same distributable surplus. Previously, a portion of this surplus was deducted at source for tax payments by the mutual fund which reduced the distributable net surplus available to dividend option investors.

A dividend reinvestment option allows investors to reinvest the dividend, but previously this amount of the dividend reinvested was less than the increase in NAV The growth option that investors experienced because all dividends were declared only after deducting the DDT. Now the choice between the Growth and Dividend option will depend on your preference for creating

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