At present, dividends earned from equity funds are tax free. Do note, you will not have to pay this tax directly, but it will be charged to the fund house. But make no mistake, it does impact your returns.
Let's say your fund gives a 10 per cent dividend (on the face value of a unit of Rs 10). That amounts to Rs 1 per unit. If 5 paisa goes towards the dividend distribution tax (DDT), you will end up only with 95 paise. This DDT will be paid by the fund house before it credits the dividend to you.
Let's drive the point home with another example. Let's say you hold 1,000 units of a fund which has announced a Rs 1 per unit dividend. Your total dividend would be Rs 1,000, the DDT amounting to Rs 50. The effective dividend (which is what you will get) would be Rs 950.
In case of debt funds, the dividend received would be added to the total income and taxed as per the income tax slab that the individual falls under. In such a case, the individual himself pays the tax, not the mutual fund.
