How Dividends Are Taxed Now

Introduction

Remember when mutual fund dividends used to be tax-free? Those days are gone. Since April 2020, dividends are taxable in the hands of the investor — just like salary or interest income.

In this blog, we explain how mutual fund dividends are taxed today, how they affect your returns, and whether you should still opt for them — using a relatable example.

What Changed? 

Before 2020: Dividends were tax-free in your hands, but the fund paid Dividend Distribution Tax (DDT). After 2020: No DDT. Instead, you pay tax on dividends as per your income tax slab. 

  ✅ New Dividend Rules

• All dividends (from equity or debt mutual funds) are added to your total income
• Taxed at your applicable income tax slab
• TDS of 10% is deducted if dividend > ₹5,000 in a financial year

• Growth Option: Reinvests gains → Taxed only on redemption → More tax-efficient for most
• IDCW Option (Income Distribution cum Capital Withdrawal): Payouts taxed as per slab → Less efficient for high-income earners

• Ramesh invested ₹10 lakh in an IDCW equity fund and received ₹80,000 in dividends in FY25.
• He's in the 30% tax bracket → ₹24,000 tax liability
• If he had chosen the Growth option, no immediate tax, and compounding would continue uninterrupted.

• Senior citizens needing regular income
• Investors in the lowest tax slab
• Others? Usually better off with Growth option

 Dividends feel nice, but the tax hit can silently eat into returns. For most investors, Growth is now the smarter choice. 

Review your mutual fund schemes. If you’re in a higher tax bracket, consider switching to Growth to let compounding do its job.

Summary Table: Dividend Taxation Post-2020