Why Liquid/Short term funds should be opted with Dividend Payout or Reinvest option?

POSTED BY Dominic Prakash ON December 20, 2010 9:38 am COMMENTS (5)

Tax Gurus,

Reading lately that the Liquid or Short term debt funds (6 to 9 months) should be opted with devidend payout or reinvest option for better tax saving. Could someone explain or point me to the right place.



5 replies on this article “Why Liquid/Short term funds should be opted with Dividend Payout or Reinvest option?”

  1. Ramesh says:

    Sorry, I am not well aware of the tax implications applicable to NRI investors. I think, recently many banks have offered good rates for NRI/NRE account holders.

    Otherwise, there is no TDS applicable to MF, as far as i know.

  2. Jig says:

    Hello Ramesh/All
    You mentioned tax deducted as per tax bracket while investing in growth of liquid funds.
    Is there any TDS or other way NRI also have the same condition while investing in Liquid funds?

    I have 10 lac to keep in liquid as i m planning to buy property once finalised and i want to keep liquid in a way that it can earn more than bank saving account. Am i thinking right way ? Can you please help me in this matter?

    Thanks in advnace.

  3. Ramesh says:

    Debt funds=MF with less than 65% equities+Fund of funds.

    For short term (less than 1 year):
    1. Debt funds other than liquid/money market funds:
    a. Dividend payout/reinvestment- The fund pays dividend distribution tax of 12.5%+3% cess(=12.8%) while the dividend in the hands of the investor is tax-free (no upper limit).
    b. Growth option- The capital gains are added to the income and taxed according to the tax-bracket of the investor.

    2. Liquid/money market funds: The DDT is 25%+3%cess (=25.75%). Rest of the things are same.

    For long term:

    The DDT remain the same and same kind of benefits are applicable for dividend payout/reinvestment.

    However, things are trickier. The indexation benefits are applicable. For the capital gains, you need to pay either 10% without indexation (which is less than the DDT) or 20% with indexation (with past indexation percentages of more than 8-10%), your income is mostly tax free. 🙂

    Hope this helps.

    1. Dominic Prakash says:

      Thanks Ramesh. I always preserve your responses.

  4. The only reason I can think of is because dividend are tax free in the hand of investors , but this is a minor advantage , not worth the hassle unless you are investing crores !


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