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distribution tax has been proposed to be removed, and it will no longer be charged
at the level of companies/mutual funds. Dividend tax will now be taxable in the
hands of the shareholders or unitholders.
For effective enforcement of such tax removal on the part of companies, the Finance Bill 2020 imposes a TDS liability on dividend paid or credited to investors.
The DDT earlier paid by companies and mutual funds on the distribution of dividends to investors is set to be abolished. To materialize the abolition of DDT, the Finance Ministry proposes to make amendments in TDS provisions. The memorandum proposal provides that TDS will be levied at 10% on the dividend income paid by a company or mutual fund to its members. Such TDS will be deducted if the amount of dividend income exceeds Rs. 5,000 during a particular financial year.
Dividend income is
chargeable in the hands of the unit holder under the head ‘income from other
sources’. The investors may also claim the credit of tax deducted on dividend
income at the time of filing their returns.
Before the introduction of Section 194K, DDT was chargeable at the level of mutual fund companies. In the hands of investors, tax on dividend received from a mutual fund was charged @ 10% if such income exceeded Rs. 10 lakh in a financial year. Besides this, any other dividend income was exempt in the hands of the investors.
Several income taxpayers have raised questions as to whether a mutual fund is required to deduct TDS on capital gains arising to an investor on the redemption of units. A press release is issued by the CBDT on 4th February 2020 to give clarifications on this behalf. The CBDT clarifies that 10% TDS u/s 194K is to be levied only on dividend payment by mutual funds and not on capital gains.
section (Section 194K) entails that a mutual fund shall be required to deduct
TDS @ 10% only on payment in the nature of dividends, and no TDS shall be required
to be deducted by a mutual fund on income in the nature of capital gains.
TDS u/s 194K is
applicable to the distribution of income made by domestic companies and mutual
funds to a resident on or after 1st April 2020. The entire capital
gains in the hands of the holder of the mutual fund units will not get taxed
Redemption proceeds paid by mutual funds will not get covered via Section 194K. The income on the redemption of mutual fund units is taxable as capital gains under the head ‘income from capital gains’. The gains or losses from the sale of units are directly taxed or allowed in the hands of the investor.
Post the insertion
of Section 194K, certain doubts arose in the minds of unitholders as to whether
capital gains or the entire redemption amounts shall be taxed at source.
Many investors are
relieved who were expecting outflows of tax on capital gains. Their uncertainty
comes to an end when the CBDT clearly states that the TDS proposal is limited
to dividend payouts only.
To prevent any
confusion, the CBDT also says that a necessary amendment regarding the applicability
of tax on mutual fund dividend should be made in the relevant provision of income
Read, Also: CBDT Notifies the Procedure of PAN Allotment for FPIs through Common Application Form (CAF).
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.
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