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TDS on Capital Gains from Mutual Funds! Is it true?

In Budget 2020, Finance Minister Nirmala Sitharaman made an announcement that the Dividend Distribution Tax (DDT) will be abolished for Domestic Companies. As a result, the dividend income which was earlier exempt would now be taxable in the hands of the shareholder.

The changes made under TDS Section 194 and the introduction of new TDS Section 194K will surely send shock waves for resident traders/investors. Let us dig deep and understand what the fuss is all about.

Taxability of Dividend Income

Up to F.Y. 2019–20

Domestic Company was liable to pay DDT (Dividend Distribution Tax) at 15% on the amount of Dividend distributed to a shareholder. This dividend included dividend on equity shares and dividend on equity mutual funds. The dividend income was exempt up to INR 10 Lakh u/s 10(34) in the hands of the shareholder. Since the income was not taxable up to INR 10 Lakh, there was no applicability of TDS to avoid double taxation.

F.Y 2020–21 Onwards

Section 115-O has been abolished in the Budget. Thus, Domestic Companies are not liable to pay DDT (Dividend Distribution Tax) on the dividend distributed on Equity Shares and Equity Mutual Funds to shareholder resident in India…. Don’t jump off your seats in excitement just yet!!

Since DDT isn’t paid by the company, the Dividend Income is now taxable in the hands of the shareholder as per applicable slab ratesouch! Now that the Income is taxable in the hands of shareholders, hence the TDS.

In Budget 2020, the following changes were made to introduce TDS on Dividend Income

What was the confusion then?

Apparently, Asset Management Company (AMC) was confused whether the Tax Deducted at Source (TDS) under Section 194K on “income” would be restricted to dividends only or also include capital gains? The Association of Mutual Funds in India (Amfi) did say that they would seek clarity from the income tax department on this issue.

There were two different School of Thoughts

Clarification Issued– However, this confusion was laid to rest by a Press Release by CBDT on 4th February. It has been clarified that a Mutual Fund is required to deduct TDS @ 10% Only on Dividend Payments and no tax shall be deducted on income from Capital Gains on Mutual Funds.

Our Interpretation!

According to Budget 2020, dividend income from equity shares and from equity mutual funds will now be taxable in the hands of taxpayers. Ergo, increasing your Taxable Income.

Also earlier, Dividend Income up to INR 10 Lakh was exempt, but according to Budget Proposal, the recipient of the dividend would be liable to pay income tax at applicable slab rates irrespective of the amount of dividend received.

With the abolition of DDT, people with income up to ₹5 lakh will not have to pay tax on dividend income.

We feel that since the Government is forgoing Tax Income of INR 25,000 crore by abolishing DDT for companies, they wish to attract Foreign Investors in the long run. We hope that this turns out to be fruitful for the Indian Economy.

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