Short take: From June, would you choose the dividend or growth option for debt funds?

Come June 1 and you would have two key changes in the tax structure of your mutual fund transactions. Here’s a quick recap of the same and how you can deal with it.

STT – simply rejoice
The Securities transaction tax (STT) that was charged on sale of mutual fund units will significantly reduce to 0.001% from 0.25%. That means for a transaction value of Rs 10,000, you would have so far paid Rs 25 as STT. Henceforth, it would be Re 0.1 or 10 paisa. That means you practically pay nothing.
This is of course good news for you.

DDT- choose your option well
The other not so good news but which can be dealt with tact is the Dividend distribution tax (DDT). Earlier, debt funds other than liquid funds suffered DDT of 14.1625% (12.5% plus 10% surcharge plus 3% cess). DDT, of course, is paid by the fund house by deducting it from your NAV.

Now, in line with mutual funds, all categories of debt funds and those that are classified as debt (such as gold funds and some international funds) will suffer DDT of 28.325% (including cess and surcharge) from June 1. That means, from hereon, the choice of whether to go for dividend or growth in debt funds becomes important if tax plays a key role in your investment strategy.

You can make your choice judiciously based on whether your holding period is less than one year or more than a year. Do take a quick look at our earlier article on the strategies you can adopt to be tax efficient: Dividend or Growth.