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 rates…ouch! 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
- Amendment of Section 194
Domestic Company should deduct TDS at 10% on dividend on equity shares in excess of INR 5,000. - Introduction of Section 194K
Asset Management Company (AMC) should deduct TDS at 10% on dividend on equity mutual funds in excess of INR 5,000.
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
- One School of thought says ‘Yes’, Capital Gains from Mutual Funds are also subject to TDS as Section 194K mentions ‘Income’ in respect of Mutual Funds should be liable to TDS @ 10%. And the definition of ‘Income’ as per the Income Tax Act includes ‘Profits and Gains’. So Unless a clarification is issued by the income tax department, the new tax proposal will apply to capital gains from mutual funds as well.
- Second School of Thought says ‘No’, Capital Gains from Mutual Funds are not subject to TDS. Equity Mutual Funds is a mutual fund that invests in equity shares of domestic companies. The Long Term Capital Gains from the sale of Equity Mutual Funds and Equity Shares is exempt from tax up to Rs. 1 lakh. So if the capital gains income is exempt, why is TDS required to be deducted on it?
Further, a provision similar to Sec 194K existed in the Income Tax Act prior to Budget 2020. The word income in respect of mutual funds was interpreted as dividend income only and not capital gains.
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.
