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Dividend Distribution Tax Calculation

The dividend distribution tax associated with debt mutual funds (dividend payout and dividend reinvestment options) has been hiked again in this budget.

Last year, the government changed the way in which the DDT was calculated. (read more here). The DDT hike by a huge extent: from 22.073% to 28.325%.

This year, they have increased the surcharge on the DDT from 10% to 12%

DDT after Budget 2014

Tax: 25%,  Surcharge: 10%, Cess: 3%

So effective DDT rate: [(25%)(1+10%)](1+3%) =28.325%

DDT after Budget 2015

Tax: 25%,  Surcharge: 12%, Cess: 3%

So effective DDT rate:[(25%)(1+12%)](1+3%) =28.840%

An increase of 0.515%.  Thus the tax arbitrage for those in the 30% slab has further decreased to

30.9% - 28.840% = 2.06%

I think those in the 30% slab can continue to use dividend reinvestment option in debt funds to minimize (if not totally erase) short-term capital gains for less than 3 years. Read more here.

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