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Photo: iStock (iStock)
Photo: iStock (iStock)

Budget 2020 brings in TDS on capital gains in mutual funds

  • Finance Bill also introduced TDS on capital gains in mutual fund for resident individuals.

Mumbai: The Finance Bill has, probably unintentionally, introduced TDS on capital gains in mutual funds, along with TDS on dividends, say experts.

Finance Minister Nirmala Sitharaman announced her intention to abolish Dividend Distribution Tax (DDT) on mutual fund dividends.

These were to be made taxable at slab rate and TDS was to be deducted on them at 10% for dividends exceeding 5,000 per year. Experts say that the Finance Bill also introduced TDS on capital gains in mutual fund for resident individuals.

"Income under the act includes capital gains. Hence capital gains in the hands of investors would also be liable for deduction of TDS at 10%," said Dhruv Rawani, a Mumbai based Chartered Accountant.

"Prima Facie, mutual funds will be liable to deduct TDS on capital gains as well as dividends as per the Finance Bill. This gets strengthened while reading the definition of income under Section 2(24) which includes capital gains," said Balwant Jain, a Mumbai based Certified Financial Planner (CFP) and Chartered Accountant.

"This will cause a lot of hardship to mutual fund investors and would opens up an arbitrage with direct equity and insurance investment products," said Rawani. At present, TDS is deducted for NRI investors in mutual funds but not resident individuals. The latter have to calculate and pay tax on a self-assessment basis.

“The TDS on capital gains on mutual funds may not be unintentional. The government wants to curb non reporting of capital gains and this may be a direct outcome of that objective," said Kuldip Kumar, Tax Partner and Leader, PwC India Global Mobility Practice.

“This will also facilitate capturing information of income and TDS in pre populated ITR. This is one step towards the government’s plan in providing pre filled ITR to taxpayers", he added.

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