‘10% TDS only on MF dividends’

The government has clarified that mutual fund houses must deduct 10% tax at source (TDS) on dividends.

On Tuesday, the Central Board of Direct Taxes (CBDT) issued a clarification, after the Budget proposal led to concerns whether the 10% TDS would be applicable only on the dividend or whether any capital gains arising at the time of redemption would be taxed.

“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,” a statement from Surabhi Ahluwalia, spokesperson, CBDT, said.

“It is hereby clarified that under the proposed section, a mutual fund shall be required to deduct TDS @ 10% 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,” the statement added.

“The proposal needed a serious rethink else it could have ended up complicating the investment process for the investor and increase the costs for the asset management company,” said Vivek Damani, a SEBI registered investment adviser, adding that the proposal, in the form presented in the Union Budget, seemed clouded with ambiguity.

Meanwhile, following the clarification from the CBDT, it is clear that the 10% TDS would only be levied when dividend income exceeded ₹5,000 in a financial year. Necessary clarification, if required, shall be proposed in the relevant provision of the law.