Taxation when dividends is received at fund level

General
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I know that when I invest in stocks directly the dividends that is given out by the company is taxed at individual level.

The question or clarity that is sought. Example TCS has declared dividends of 31 per share. Assuming I have 10 shares, I will get 310 as dividends which will be treated as income and taxed. SBI Nifty 50 ETF who also owns TCS assuming 100 shares will also get dividends of 3100. I was told that this amount when received by the ETF is not taxed at all. It seems there is an exemption. Is this true. The entire amount, the ETF reinvest.

Chat GPT says * No Tax at Fund Level: When a company in the portfolio pays a dividend, the mutual fund receives the full amount without any tax deduction at the source (TDS) or corporate tax.

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Yes, it is true that there is effectively 0% tax deducted when a company pays a dividend to a SEBI-registered mutual fund or ETF in India Exempt under Section 10(23D)

The Legal Exemption

  • Section 196(iv): Under this section of the Income Tax Act, no person is allowed to deduct tax (TDS) from any dividend or interest payable to a mutual fund specified under Section 10(23D).
  • Fund-Level Exemption: Mutual funds and ETFs are exempt from paying tax on their total income, including dividends, interest, and capital gains
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In the Growth option, no tax is paid by the fund and the returns are reinvested. You are required to pay capital gains tax only when you redeem the investment. However, in the IDCW option, the income is taxed as per your slab rate as the fund periodically pays out income to investors, similar to dividends.

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But it’s added to NAV and it’ll become Capital gains when you sell(in growth option). This is one way in which you can convert normal income to special rate income through the shell company sbi. You can do the vice versa using idcw option. Whichever tax slab you fall in will determine your tax efficient option.