How much tax is deducted on mutual fund and money market fund dividends?

A dividend from a mutual fund is not taxed at one flat rate. The Income Tax Ordinance, 2001, as amended to 30 June 2026, splits it by where the fund’s income came from: debt securities or equities. This page covers the rates for dividends paid in tax year 2027 (1 July 2026 to 30 June 2027).

What does the law say?

Section 150 requires every person paying a dividend to deduct tax “from the gross amount of the dividend paid” at the rate in Division I of Part III of the First Schedule. For mutual funds, clause (ba) of that Division reads:

“25% and 15%, in case of mutual funds, contingent upon proportional income derived from average annual investments in debt securities and equities respectively”

Its proviso adds that “where the corporate entity is recipient of the dividend, the component derived from the debt securities shall be taxed at the rate of twenty-nine percent.”

Section 5 charges the same dividend in the unit holder’s hands at the rate in Division III of Part I of the First Schedule. Division III has an identical clause (ba), so the rate deducted by the fund matches the rate charged on the unit holder.

Recipient	Debt-derived component	Equity-derived component
Individual or association of persons	25%	15%
Company (corporate entity)	29%	15%

How does it work in practice?

The fund deducts the tax when it pays the dividend, on the gross amount. The deduction depends on the fund’s own mix of income from debt securities and equities. Clause (ba) ties the split to “proportional income derived from average annual investments”. The Ordinance text does not set out a formula for measuring that proportion, and this page does not supply one. The fund works out the split, and its dividend notice or tax certificate is where a unit holder would see it.

Clause (ba) does not use labels such as “money market fund”, “income fund” or “stock fund”. What matters is the source of the income. A fund that holds only debt securities, such as treasury bills or term finance certificates, would have its dividend taxed wholly at the debt rate. A fund that earns mainly from shares would have most of its dividend taxed at 15%.

Section 8 makes tax imposed under section 5 “a final tax on the amount in respect of which the tax is imposed”. The dividend is not added to your other income, no expense is deductible against it, and no loss or tax credit reduces it.

Worked example (illustrative figures)

An individual in an income fund. Ayesha, a school teacher in Lahore, receives a dividend of Rs. 200,000 from a fund whose income for the year came 80% from debt securities and 20% from equities.

• Debt component: Rs. 200,000 x 80% = Rs. 160,000. Tax at 25% = Rs. 40,000.
• Equity component: Rs. 200,000 x 20% = Rs. 40,000. Tax at 15% = Rs. 6,000.
• Total tax deducted: Rs. 40,000 + Rs. 6,000 = Rs. 46,000. Ayesha receives Rs. 154,000.

A company in the same fund. A Faisalabad textile company receives Rs. 1,000,000 from the same fund.

• Debt component: Rs. 800,000 x 29% = Rs. 232,000.
• Equity component: Rs. 200,000 x 15% = Rs. 30,000.
• Total tax deducted: Rs. 262,000.

An individual in an equity-heavy fund. A fund with income 10% from debt and 90% from equities pays Ayesha Rs. 200,000.

• Rs. 20,000 x 25% = Rs. 5,000, plus Rs. 180,000 x 15% = Rs. 27,000.
• Total: Rs. 32,000.

What if I am not on the active taxpayers’ list?

Rule 1 of the Tenth Schedule says that where tax is deducted from a person not appearing in the active taxpayers’ list, the rate “shall be increased by hundred percent of the rate specified” in the Ordinance. On that wording, a 15% rate would become 30% and a 25% rate would become 50%. The dividend page for non-filers covers this rule in more detail.

What if I redeem my units instead of receiving a dividend?

A dividend and a redemption are taxed under different provisions. The gain on redeeming units falls under section 37A and the mutual fund proviso in Division VII of Part I of the First Schedule, which has its own rates. The redemption page explains those.

How did this rule change?

Footnotes in the consolidated text show that clause (ba) was inserted by the Finance Act, 2025. Before that, clause (b) as it stood after the Finance Act, 2024 taxed mutual fund dividends at 15%, with a proviso that funds “deriving fifty percent or more income from profit on debt” were taxed at 25%. The present rule replaced that all-or-nothing test with a proportional split.

Common mistakes

• Applying 15% to every fund dividend. Clause (b) now covers REITs and residual cases. Mutual funds fall under clause (ba), which charges 25% on the debt-derived share.
• Assuming the fund’s name decides the rate. The clause looks at income from debt securities and equities, not the fund’s category label.
• Using 25% for a company. The proviso to clause (ba) sets 29% on the debt component when the recipient is a corporate entity.
• Adding the dividend to taxable income in the return. Section 8 keeps it outside every head of income.

What to check in the official text

Read section 150, sections 5 and 8, clause (ba) in both Division I of Part III and Division III of Part I of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check the fund’s statement for the debt and equity split it applied, since the Ordinance does not itself state how that proportion is measured.