InvestorQ : Are dividends on debt funds also taxed as capital gains?
Mahima Roy made post

Are dividends on debt funds also taxed as capital gains?

Answer
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Aditi Sharma answered.
1 year ago


Dividends are not taxed as capital gains because these are only paid out by the fund in case of dividend schemes. Growth plans don’t payout dividends. Debt funds pay out dividends in case you opt for the dividend plan instead of a growth plan, not otherwise. While debt fund dividends are tax free in the hands of the investor, the dividends are subject to dividend distribution tax (DDT), which is deducted by the company before the dividends are paid out to the investor. The DDT not only entails the flat rate of tax but also surcharge and cess on top of that. The DDT on debt fund dividends is imposed at the rate of 25% and on top of that the cess of 4% and surcharge of 12% are also imposed which total effective rate of DDT to 29.12%, almost at par with what you pay on short term capital gains. In most cases, this turns out to be very uneconomical to opt for a dividend payout plan.