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Dividends are NOT tax-free

You will often come across advertisements and articles proclaiming that so-and-so investment gives tax-free dividend payouts. This, however, is not correct. Even dividends attract tax.

Dividend income, as you all know, comes from your investments in 
a) equity shares 
b) debt / gold-based mutual funds
c) equity-based mutual funds, and
d) :-)  Marriage is an investment which pays dividend if you pay interest" ~ Bob Monkhous :-)

Equity shares
When a company declares its dividend, it has to deduct the Dividend Distribution Tax (DDT) and only the "net amount", is paid to the shareholder. 

Presently, DDT rate is 15% (+ applicable surcharge and cess). 

Of course, you don’t have to pay any additional tax on the dividends that you receive. 

Debt / Gold-based mutual funds
Similar to equity shares, Mutual Funds have to pay the "net dividend" to the unit-holder after deducting DDT. 

DDT rate on non-equity MFs is 25% (+ applicable surcharge and cess)

Again, you don’t have to pay any further tax on this dividend income. 

Equity-based mutual funds
There is no DDT on the dividends distributed on equity-based mutual funds. 

You too don’t have to pay any tax on it after your receive it. 

Well, if you think that the Govt. is being generous, you are sadly mistaken. Since equity MFs already suffer DDT when they receive dividends on their investments, they need not again pay DDT when they distribute the dividend to their unit-holders.


As you can see, there is no difference between receiving your salary / interest or the dividends. Tax is deducted at source in both instances. 

In one case it is the TDS as per the rates specified and in the other it is the DDT as per the rates specified (except that TDS is not the final tax liability, whereas DDT is the full and final tax liablility; as discussed in my blog 'TDS is not the end of your tax trauma').  

Hence you need to factor in this tax deduction when you are making any investment decision.

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