In a big relief to mutual fund investors, the Central Board of Direct Taxes (CBDT) has clarified that no additional tax will be levied on redemptions or repurchase of units and issue of bonus units.
The CBDT has clarified in its statement that "redemptions of units or repurchase of units would not attract levy of tax under sub-section (2) to Section 115R of the act as such income is not of the nature of income distributed to the unit holders and hence lies outside the purview of this section".
The Section 115R of the Income Tax Act says that any amount of income distributed by a company or a mutual fund to its unit holder should be taxed, and these entities would be liable to pay additional income tax on such distributed income at the prescribed rates.
The income tax officials were of the view that redemption or repurchase and issue of bonus units in a mutual fund is a distribution of income (like the dividend paid) to investors, and hence the proceed should be taxed. Fund houses had argued that redemptions are not distribution of income, and any move to tax redemptions would amount to double taxation. The redemption proceeds are anyway taxed under capital gains tax.
"The clarification has brought big relief for both the investors and the mutual fund houses as they don't have to spend time and money in unnecessary litigations", says Amit Maheshwari, partner, Ashok Maheshwary & Associates.