We will talk about Equity , Debt and Liquid Funds . We will also discuss dividend distribution tax is treated for all these funds.
First understand what is DDT (dividend distribution tax)
Dividend received from a mutual fund is tax free , but only at receivers hand . But mutual funds have to pay a tax on that dividend to Govt before giving it to us . So actually the tax is paid by mutual fund on behalf of us . This tax is called DDT .
Now lets go ahead and see different types on Funds .
Equity Funds
They are the funds that invest more than 65% of their corpus in equity shares of companies. The dividend distributed by such funds is exempt from the dividend distribution tax. So all the dividend which is declared comes to the unit holders , you get 100% of dividends. But don’t think that this is some extra income .. it is just a part of your own money , after you get the dividend , NAV comes down by that much . This is difference between growth and dividend funds . You you actually got some money back , nothing else.
Dividends are are totally tax free and not even DDT is applied to it .
Why to invest : You should invest in Equity mutual funds when you want to invest for long term and when you can take risk . Understand that these funds invest primarily in Equity , so there is more risk , but if you are investing for long term and want capital appreciation to happen , these are the funds for you .
Debt Funds
These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. The dividend from these Funds are subject to 12.5% Dividend distribution tax . The fund is also liable to pay a surcharge and a cess of 10% and 3%, respectively, on the tax. The effective tax rate comes to 14.16%.
Why to invest : They are debt products and offer good liquidity also . If you want to invest some money for safe returns and for short term goal , then Debt funds are something you can look at .
Liquid Funds
These invest in short-term debt securities (which have a duration of less than a year) like commercial papers, certificates of deposit and call money. The income distributed by such funds is subject to an income distribution tax of 25%. The fund is also liable to pay a surcharge and cess of 10% and 3%, respectively, on the tax. The effective tax rate for liquid and money market funds is 28.32%.
Why to invest : The main reason for investing in Liquid funds should be Liquidity factor , these funds are most liquid and least volatile .. So if you need to have liquidity in your portfolio , always invest some money in Liquid funds , any extra money lying in your Saving Account above your 1 month requirement should be in Liquid fund .
Conclusion :
There are different type of funds and they all have different purpose , you should see which one suits you and accordingly invest in that . Dividend received from mutual funds are not any extra money like Stock dividend. It is your own money .
Comments please .
Read what is Repo rate and CRR
Read what are different tax treatment on different products
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{ 36 comments… read them below or add one }
A stock fund or equity fund is a fund that invests in Equities more commonly known as stocks.
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Well I am now considering putting some amount in a liquid fund do you have any suggestions about the various options available?
@Sumi
See this : http://www.valueresearchonline.com/toprated.asp
Dear Manish
I appreciate ur efforts and quick response to our queries.
I would like to know more about liquid funds. What is the minimum lock-in period, mimimum amount,etc. Which are best liquid funds available? How much time does it take to get invested amount back into bank account?
How is it better from recurring deposit in the bank?
Regards
Vikrant
@Vikrant
* What is the minimum lock-in period
No lock in period in most of them , they are not tax saving funds , hence you can take the money out anytime you want .. But make sure to check the fund rules . some fund might put some small locking period .
* mimimum amount
Depends on the Fund , but mostly you can start with 5-10k .
* Which are best liquid funds available?
You need to look at http://www.valueresearchonline.com/toprated.asp
* How much time does it take to get invested amount back into bank account?
Not sure .. depends on what kind of debt fund are you chooseing , but it can range from 3 days to 8 days .
* How is it better from recurring deposit in the bank?
Better taxation , Might be more returns (at cost of risk)
Manish
Hi Manish,
I looked at http://www.valueresearchonline.com/toprated.asp
and I was looking for Liquid plus product so I checked Debt: Liquid Plus Inst
And in all initial investment looks like 1 crore..
Also what is ‘pricing method’? what does ‘forward’ signify here?
Thank you,
Balbir
Balbir
go to the “Fund Details” and you will see the minimum investment required .. generaly its 5000 . No idea whats “forward”
Manish
Just check “Debt: Liquid Plus”. It is for retail investors. “Debt: Liquid Plus Inst” category is meant for the institutional investors and the list provides the information about the MFs.
Rajesh
Thanks for the information
manish
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1 CASE 2
my investment is 1,00,000 (daily reinvetment) 1,00,000 (payout)
assume after a month – 1,05,000 (menas 5000 1,00,000(5,000 payout)
is reinveted)
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Sandeep
DDT will not be there if its an equity fund, DDT is applicable only to debt funds .
So in case of Dividend reinvestment all your 5000 will be invested back in the same fund . nothing will be cut
. No STCG .
Manish
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1
my investment is 1,00,000 (daily reinvetment)
assume after a month – 1,05,000 (menas 5000 is reinveted)
CASE 2
My investment is 1,00,000 (5,000)
after a month my my current value is 1,00,000 as 5000 is payout
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1
my investment is 1,00,000 (daily reinvetment option)
assume after a month – 1,05,000 (menas 5000 is reinveted)
CASE 2
my investment is 1,00,000 (payout option)
ater a month my current value is 1,00,000 (5,000 payout)
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Sandeep
DDT will not be there if its an equity fund, DDT is applicable only to debt funds .
So in case of Dividend reinvestment all your 5000 will be invested back in the same fund . nothing will be cut
. No STCG .
Manish
Manish,
–Will there be DDT in case of Debt funds with Growth option and which are hold/invested for long term (say more than 1 year)?
– What is the tax structure for Equity MF which are sold below 1 year(as more than 1 year is tax free). How much tax is deducted at source ?
Amol
- No DDT in growth option , its only with dividend option of Debt Funds .
- 15% tax on short term capital gains (less than one year) of equity funds (65%+ equity) . You have to pay taxes , there is no tax deducted at source
Manish
Manish,
I have around 4.5 Lakh of surplus cash that I have saved in my “Marriage Fund” savings account. I want to move this whole amount to Liquid Funds (as I might have my marriage in another 4-5 months). I was able to go through the Debt:Liquid funds category on ValueResearch. Thought their allocation to “Debt” and “Other” instruments looks ok (NO equities), I am going ahead with “Fortis Money Plus Reg-G” Liquid fund plan. Just wanted to run by you to see if you can comment of this Liquid Fund and/or my plan of choosing Liquid Funds for this surplus money? I read in your article somewhere that “money that is lying ideally for more than a month, should be in Liquid Funds”. You are doing a fine job as because of your efforts I have gained some knowledge and have startede taking steps towards my PF.
Harpreet
HDFC Short term fund might be a good option : http://valueresearchonline.com/funds/newsnapshot.asp?schemecode=1237
Hello Manish,
I am little confuse over few things about taxes on MF.
As i know(please correct me, if I am wrong)
* Debt MF
STCG : Will be added to your income slab
LTCG: 10 per cent without indexation OR 20 per cent with indexation, whichever is lower
I have two questions,
- When we say that STCG will be added to income slab does it mean AMC do not deduct the taxes at source and I have to take care of it while filing the tax return for that fiscal year?
Second question
- If I buy debt oriented funds with a growth option in that case does DDT come into picture since I bought it with Growth option and NOT dividend.
please guide on this
Trupti…
Trupti
- Yes, AMC does not deduct anything at source , all the profit you get in your hand , its your obligation to pay tax on it and file the returns .
- DDT is applicable only on Divided option of Debt funds , For growth option as there is no divided distributed to public , no DDT is applied . Also DDT is not applicable to Equity funds (even for dividend option).
Manish
Hi manish,
I’m little confused about liquid fund, so can you please briefly clarify me the basic differences between debt and liquid funds?? how does liquid fund is more convenient as comparason to bank recurring if any ????????
Regards,
Avijit
Avijit
Liquid funds are category of debt funds , which are liquid in nature , which means that you can liquidate your money faster in liquid funds compared to other kind of debt funds . debt funds are not convenient compared to bank RD ,just that they are more tax efficient, but bank RD are much simple to understand
Manish,
how safe liquid funds are ? can we say that they are 100% safe. When Liquid funds are category of debt funds then why it has more tax rate as 28.32% as opposed to 14.16% that any debit fund has?
awaiting for your response
Amol
No liquid funds are not 100% safe, they are debt funds and they still carry the interest rate and default risk, however you can take them “as-good-as” safe . depends if you consider 1-2% risk as RISKY or not .
Manish
manish,
what is the different between liquid and liquid plus…any idea?
Kamlesh
read this : http://www.rediff.com/money/2008/sep/15perfin1.htm
Manish
Hi Manish,
first of all thank u fr ur reply, can u plz guide me what is debt and equity market? in mutual fund is there any fund which given a tax benefit of more than 100000/ per annum to investor ? if any customer switces his fund from liquid to equity/debt fund, is there any charges involved ???????
To learn more on what is debt and equity markts , you have to read more , it cant be explained in comment section .
Nothing gives more than 1 lac of tax exemption , there is no swtiching thing in mutual funds generally , you have to sell one and buy another, in which case there can be exit loads in some mutual funds before 1 yr
Manish
Hi manish,
My question is in mutual fund all we know apart from the principal amount whatever amount gained that is tax free in investor’s hand but whatever amount is investing by an investor are they tax free or taxable?
Not sure what you are asking, profits in equity funds are tax free after one year only . Not before that .
Manish
Manish,
You said that “the effective tax rate for liquid and money market funds is 28.32%.”
how does this work?
-Is it tax free in the hands of investor(but AMC pays for it from fund profit) ? OR
- Investor has to pay it in yearly tax return ? OR
- AMC pays it ?
also, what is STCG and LTCG for liquid funds
thanks in advance
Kaval
Kaval
This is the tax you have to pay and its only for Short term , in long term , you can avail indexation benefits also.
Manish
thanks manish
sorry to question you again. As I planning to park some money into liquid funds I would appreciate your help beforehand
what I understood is that the profit from liquid funds needs to be taken care in that fiscal year tax return however i am thinking if someone comes under 20% tax bracket still he has to pay 28.32% tax on profit from liquid funds ? Can you please elaborate
Kaval
No , if you are in 20% tax braket , then the effective return is not lesser . Its just 20% , i was mainly talking about people in highest tax bracket , who also have to pay 10% and 3% of surcharges which makes their effective rate at 28.32%
>>> 25 * (1.1) * (1.03)
28.325000000000003
Manish
thats quick reply from you
I think, i got the point now.
To summarize,
if I choose the dividend option then I pay DDT which is 28.325 and if I choose this growth option I pay STCG
Yes
You pay tax on growth as STCG only before 1 yr , else its free
Manish