Kavitha Menon's Blog

Reduce tax impact on Debt Mutual Funds In the last couple of years some changes made in tax rules for dividends in mutual funds have made the dividend option of debt plans very unattractive. While dividend distribution tax has been done away with, mutual funds now deduct TDS (10%) and Stamp duty (.005%) every time dividends are paid and reinvested respectively. Besides the dividends are fully taxable in the hands of the investor. Clearly dividend options is not an option anymore and as an investor you must ensure you move lock stock into the growth option Short term capital gains  (if the units are sold before three years) in  debt mutual funds  are taxed as per applicable  tax  rate of the investor. Therefore, if your  tax  rate is 30% then  short term capital gains tax on debt fund  is 30% + 4% cess.  Long term capital gains  of  debt fund  are taxed at 20% with indexation. With some management , the overall effective tax payout can be brought down considerably. Let me explain