Mutual Fund investors alert! CBDT circular clarifies how TDS will be applied on dividend after DDT removal

Mutual Fund investors got a major relief from the government in budget 2020 as the Finance Minister Nirmala Sitharaman announced the removal of DDT (Dividend Distribution Tax) from the hands of the company and mutual fund houses. She announced that from now onward, the DDT will be paid by the investors only. This move was hailed by both mutual fund houses and the investment experts. However, things were a bit confusing on the applicability of TDS (Tax Deduction at Source) provisions on mutual fund dividends. Taking cognizance of the confusion, the Central Board of Direct Taxes (CBDT) has come forward and made things clear on the TDS-related confusion in mutual fund dividends. 

It clarified that the DDT has been removed from the company and mutual fund end to tax the same in the hands of the investors. It said that the Budget 2020 proposes to levy TDS at the rate of 10 per cent on the dividend or income paid by the Companies or Mutual Fund houses to its share or unit holder if the amount of such dividend or income exceeds five thousand rupees in a Financial Year.

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"The Finance Bill 2020 proposed to remove Dividend Distribution Tax (DDT) at the level of Company/ Mutual Fund and proposed to tax the same in the hands of share/unit holder. It was also proposed to levy TDS at the rate of 10% on the dividend/ income paid by the Company/Mutual Fund to its share/unitholder if the amount of such dividend/ income exceeds five thousand rupees in a Financial Year," the circular from CBDT read.

The statement went on to read that 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. 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. Necessary clarification, if required, shall be proposed in the relevant provision of the law.