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TDS at 10% for mutual fund income above Rs 5000

New Delhi: Investing in mutual funds may become less attractive as the government has proposed a tax on the income distributed by asset managers to unitholders.

Finance Minister Nirmala Sitharaman in the Union Budget for 2020-21 has introduced a 10 per cent TDS (tax deducted at source) provision on the income distributed by a mutual fund to its unitholders if such income exceeds Rs 5,000.

New section in Income Tax Act

The Finance Bill, 2020, has proposed the insertion of a new section — 194K — in the Income Tax Act, which states “any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of ten percent of such income”.

It is not clear if the gains will be taxed or the entire redemption amount made by the unitholders will be taxed at source.

Mutual fund income over Rs 5,000 will now be subject to 10 per cent tax deducted at source (TDS), according to a proposal by the Ministry of Finance under the Union Budget 2020.

“After Section 194J of the Income Tax Act, the following section shall be inserted, namely:– 194K: Any person responsible for paying to a resident any income in respect of (a) units of a mutual fund specified under Clause (23D) of Section 10; or (b) units from the Administrator of the specified undertaking; or (c) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income tax thereon at the rate of 10 per cent,” the Finance Bill read.

According to Section 194K, any “resident” deriving an “income” from mutual funds, specified under Section 10 Clause (23D), will be subject to have a 10 per cent TDS.

Dividend income

Before the clause was introduced, TDS on mutual funds was deducted for NRI investors and not residents.

Earlier, only dividend income on mutual funds exceeding Rs 1 lakh was taxed at 10 per cent. Unless a clarification is issued, the new tax proposal will apply to capital gains from mutual funds as well. This is because the definition of “income” under the existing Income Tax Act as per Section 2 also includes “profit and gains”.

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