(Photo: iStockphoto)
(Photo: iStockphoto)

CBDT says 10% TDS applicable only on dividend payment by mutual funds

  • No tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains
  • Stakeholders have been seeking clarification ever since Budget 2020 proposal to scrap dividend distribution tax on mutual funds and introduction of TDS

CBDT has issued a clarification on Tuesday that the requirement of deducting TDSA at 10% will only apply for dividend payments by mutual funds.

No tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains, clarified Central Board of Direct Taxes.

Finance Minister Nirmala Sitharaman had in Budget 2020-21 scrapped dividend distribution tax (DDT) paid by companies and mutual funds on dividend paid to shareholders or unit holders.

In place, it was proposed to levy tax deducted at source (TDS) of 10% on dividend/income paid by a company or mutual fund to its share/unit holder if the amount of such dividend/income exceeds 5,000 in a year.

The Finance Bill, 2020, has proposed the insertion of a new section — 194K — in the Income Tax Act, which states "any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of ten percent of such income".

It was not clear if the gains will be taxed or the entire redemption amount made by the unitholders will be taxed at source.

Industry body Amfi has also sought clarification from relevant tax authorities with regard to the government's plan to scrap DDT on mutual funds and introduction of tax deducted at source on the income distributed by such products.

In a statement, CBDT said queries have been raised if mutual fund would be required to deduct TDS also on the capital gains arising on redemption of units.

"It is hereby clarified that under the proposed section, a mutual fund shall be required to deduct TDS at 10 per cent only on dividend payment and no tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains," it said.

It went on to state that necessary clarification, if required, shall be proposed in the relevant provision of the law.

With inputs from PTI

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