Mutual Funds were designed to be tax-free investment vehicles. But over a period of time, income from mutual funds has been subject to various taxes such as capital gains, securities transaction tax and the recent talk of the town – dividend distribution tax.
Hon’ble Finance Minister, in her recent budget speech for 2020-21, abolished the Dividend Distribution Tax (DDT), usually paid by Mutual Fund Companies (AMCs). However, as a matter of fact, the DDT is simply passed on to the investors, i.e., investors will have to pay tax on the dividend income received.
We compare the old regime vs new regime of the Dividend Distribution Tax (DDT). Please do share your thoughts in the comments section.
Taxation of income distributed (hereinafter referred to as ‘dividend’) by Mutual Funds
A. Old Tax Regime (Applicable for FY 2019-20)
1. What is the tax treatment of dividend received from Mutual Funds in the hands of unitholders?
Presently, dividend income received from Mutual Funds is exempt in the hands of the unitholders (resident as well as non-resident) under section 10(35) of the Income-tax Act, 1961 (‘the Act’). However, the Mutual Fund is required to pay dividend distribution tax (‘DDT’) on the amount of dividend under section 115R of the Act.
2. What is the amount of DDT payable by Mutual Funds?
The Mutual Fund is required to pay a DDT under section 115R of the Act at the following rates (excluding surcharge and cess) –
| ​Category of Investors | ​Equity Oriented Scheme (refer Note below) | ​Other than Equity Oriented Scheme (refer Note below) |
|---|---|---|
| ​Resident Individual / HUF | 10% | 25% |
| ​Domestic Company | 10% | 30% |
| ​NRI | 10% | 25% |
Note: For the purpose of determining the tax payable, the amount of distributed income be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund. The impact of the same has not been reflected above.
B. New Tax Regime (Applicable for FY 2020-21)
3. What is the new tax regime as per the Finance Act, 2020?
The Finance Act, 2020 has removed the levy of DDT in the hands of the Mutual Fund and adopted the classical system of dividend taxation under which the Mutual Funds would not be required to pay DDT. The dividend shall be taxed only in the hands of the unitholders.
However, the Mutual Funds shall be required to deduct tax at source (‘TDS’) on the dividend income at prescribed rates for all unitholders i.e. resident/non-resident/FII/FPI.
4. What is the date of applicability of the new tax regime?
The new tax regime shall be applicable w.e.f. April 1, 2020 and will apply from FY 2020-21.
5. What type of Mutual Fund schemes are covered?
All types of Mutual Fund schemes are covered under the new tax regime, i.e. equity oriented and other than equity oriented mutual fund schemes under dividend payout and dividend reinvestment options.
6. How will dividend income be taxed in the hands of unitholders?
The dividend shall be taxed in the hands of the unitholders at applicable tax rates provided under the Act for the category of the unitholders.
7. When is TDS required to be deducted by the Mutual Fund?
TDS is required to be deducted at the time of credit of such income to the account of the unitholder or payment of any income to unitholder, whichever is earlier.
Note: The amount of dividend reinvested under the dividend reinvestment option shall be deemed as dividend paid and accordingly, TDS provision shall apply.
8. What is the TDS rate on dividend income credited / paid to resident unitholders?
As per section 194K of the Act, TDS at the rate of 10% should be deducted on dividend income credited / paid to resident unitholders.
9. What is the threshold limit for applicability of TDS on dividend credited / paid to resident unitholders?
Section 194K of the Act provides for a threshold of INR 5,000 in aggregate for the financial year. TDS provisions should not apply in case where the amount of dividend credited / paid does not exceed the threshold limit in a particular financial year.
Note: The threshold limit is applicable for aggregate dividend credited / paid in a financial year. The same is to be computed at the PAN level.
However, on account of practical difficulties involved due to unique nature of mutual fund investments and different schemes involved, HDFC Mutual Fund shall deduct TDS from each dividend declared i.e. even without reaching INR 5,000 threshold. In case of total TDS exceeding the actual tax liability of any investor, he/she can claim refund while filing income-tax return.
10. What is the TDS rate on dividend income credited / paid to non-resident unitholders?
As per section 196A of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to non-resident unitholders (other than FII/FPI). There is no threshold limit applicable in case of dividend income credited / paid to non-resident unitholders.
Separately, as per section 196D of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to FII/FPI. There is no threshold limit applicable in case of dividend income credited / paid to FII/FPI.
11. What is the TDS rate on dividend income in case unitholder has not registered PAN in the folio?
TDS shall be deducted at the following rates in case PAN of unitholder is not available:
Resident: 20%
Non-resident: 20% (plus applicable surcharge and cess)
12. What is the applicability of TDS provisions in case of unitholder having a PAN Exempted KYC Reference Number (PEKRN’)?
There is no exemption provided from TDS provisions under the Act for a unitholder having a PEKRN. Accordingly, it will be considered as a case of PAN not available, and TDS shall be deducted as mentioned in point 11.
13. What is the applicability of TDS provisions in case of dividend credited / paid to minor?
As per section 64(1A) of Act, income of minor child gets clubbed with the income of the parent for tax purposes. Accordingly, the parent should provide a declaration under section 199 of the Act read with Rule 37BA(2) of the Income-tax Rules, 1962 to the Mutual Fund for TDS deduction under the PAN of the parent.
In the absence of such a declaration, the Mutual Fund should deduct TDS on dividend credited / paid under the PAN of the minor.
14. When will the Mutual Fund issue TDS Certificate?
The TDS Certificate shall be generated on the TRACES portal by the Mutual Fund and issued to the unitholders on a quarterly basis as specified under the law.
15. Can a unitholder obtain a certificate from income-tax authorities for TDS deduction at a lower / nil rate?
A resident unitholder may make an application to the income-tax authorities under section 197 of the Act for obtaining a certificate for lower / non-deduction of TDS on dividend income credited / paid by Mutual Fund.
16. Can a unitholder submit Form No. 15G for no TDS deduction?
A person (not being a company or firm) can submit Form No. 15G to Mutual Fund for non-deduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.
It is recommended that the form should be submitted on an annual basis at the start of the financial year at any of the Official Points of Acceptance of the AMC.
17. Can a unitholder submit Form No. 15H for no TDS deduction?
A resident individual (aged 60 years or more) can submit Form No. 15H to Mutual Fund for nondeduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.
It is recommended that the form should be submitted on an annual basis at the start of the financial year at any of the Official Points of Acceptance of the AMC.
18. Can a non-resident unitholder avail tax treaty benefit on dividend income received from Mutual Fund?
As per the provisions of section(s) 196A/196D of the Act which is specifically applicable in case of non-resident unitholders/FII/FPI, the Mutual Fund shall have to deduct TDS at the rate of 20% (plus applicable surcharge and cess) on dividend income credited / paid to non-resident unitholders/FII/FPI, as section(s) 196A/196D of the Act do not make reference to “rates in force” but provide the withholding tax rate of 20% (plus applicable surcharge and cess).
The non-resident unitholders/FII/FPI may offer the said dividend income to tax in his income-tax return at a lower tax rate by claiming the benefit under relevant tax treaty, if any, subject to eligibility and compliance with applicable conditions.
Disclaimer: The information set out in the document is for knowledge purposes only and is not an offer to sell or a solicitation to buy/sell any units of Plans/Options of schemes of mutual fund. Candidates should be aware that the fiscal rules/ tax laws may change and there can be no guarantee that the current tax position may continue indefinitely. In view of the individual nature of the tax consequences, each investor is advised to consult his/ her own professional tax advisor. The information/ data herein alone is not sufficient and shouldn't be used for the development or implementation of an investment strategy and should not be construed as investment advice. Investors alone shall be fully responsible / liable for any decision taken on the basis of this document. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
