Multiple choice

Which of the following is not true about dividends of a mutual fund?

  1. Dividends are tax free in the hands of investors

  2. Debt mutual funds have to pay dividend distribution tax

  3. Dividends can be paid out of unrealized profits of the mutual funds

  4. Equity mutual funds do not have to pay dividend distribution tax
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Mutual fund dividends can ONLY be paid out of realized profits, not unrealized profits. This is a key SEBI requirement to ensure dividends are backed by actual gains. Dividends are tax-free in investors' hands (both equity and debt). Equity mutual funds don't pay dividend distribution tax, but debt funds do. Option C is the statement that is NOT true because dividends cannot come from unrealized profits.

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