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Govt clarifies 10% TDS applicable on dividend payment only, not on capital gains

BusinessToday.In     February 4, 2020

Mutual fund income over Rs 5,000 will be subject to 10 per cent TDS on dividend payment only and that no tax will be deducted on income on capital gains, Central Board of Direct Taxes has clarified. In Budget 2020, the Centre proposed to levy TDS or Tax Deducted at Source at 10 per cent on dividend income paid by a company or mutual fund to its shareholder if the amount exceeds Rs 5,000 a year.

The Finance Bill, 2020, proposed to remove Dividend Distribution Tax (DDT) at the level of company or mutual fund and proposed to tax the same in the hands of share or unit holder. "Queries have been received to the effect that whether under the proposed section 194K, the Mutual Fund would be required to deduct TDS also on the capital gains arising on redemption of units," CBDT statement said, adding that no TDS will be cut if income was in nature of capital gains.


Notably, TDS on mutual funds was applicable for only NRI investors or NRIs so far. Also, only dividend income worth over Rs 1 lakh concerning mutual funds was taxed at 10 per cent.

The Ministry of Finance, via Clause 80 of the Finance Bill 2020, proposed to insert a new section -- 194K, under which mutual funds will be required to deduct TDS on capital gains arising on redemption of units.

According to Section 194K, "any person responsible for paying to a resident any income in respect of units of a mutual fund specified under clause (23D) or units from the Administrator of the specified undertaking or units from the specified company, will at the time of credit of such income to the account of the payee deduct income-tax thereon at the rate of 10 per cent."

Finance Minister Nirmala Sitharaman, in Budget 2020, introduced new slabs and reduced the tax rate for different slabs for an individual income of up to Rs 15 lakh per annum, if a taxpayer opts for foregoing exemptions and deductions.

The minister further said that the new regime will be optional and the people can continue with old regime if they desire so. Observing that there are about 100 tax exemptions and deductions, she said that 70 of them are being removed in the new simplified tax regime, while the remaining will be reviewed and examined in due course.  

Also read: Budget 2020: DDT gone! To be applicable to individual investors only

Edited by Manoj Sharma

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