There are many investment avenues available for one to park their money. However, many investors refrain from venturing into these territories. The major reason being a lot of investors really do not understand the entire working of many investment options available.
Today, we shall try and understand the difference between Debt Funds and Liquid Funds. Also, try to decipher the tax treatment both the entities are liable to. However, before we proceed with the different kinds of funds. Let us try to understand the term “Dividend Distribution Tax”.
Dividend Distribution Tax (DDT)
Dividend received from a mutual fund is tax free, but only at receiver’s hand. However, mutual funds have to pay a tax on that dividend to government before giving it to us. So actually the tax is paid by mutual fund on behalf of us. This tax is called DDT.
Let us try to understand Equity, Debt and Liquid Funds.
Equity Funds are the type of funds where about 65% of the corpus is invested in equity shares of different companies. The dividend acquired from these funds is exempted of DDT. Therefore, the unit holders receive 100% of the dividend declared to them. However, it isn’t any form of extra income. It is very much your invested money that you receive after the dividend.
These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. These funds are subject to DDT at the rate of 12.5%. A surcharge and cess of 10% and 3% respectively is applicable as well. These funds come with an effective tax rate of 14.16%.
Liquid funds are usually short-term debt securities. They invest in commercial papers, certificates of deposit and call money, where the duration is less than a year. The income incurred from such funds is subject to DDT of 25%. Like the debt funds, these funds too are liable to pay a surcharge and cess of 10% and 3% respectively on the tax.
Well, there are different types of funds available in the market. Each comes with its own benefit and purpose. One needs to invest in a fund that best suits their needs.