TDS on Mutual Funds: I-T Dept clarifies 10% tax at source only on dividends, not on capital gains

The Income Tax Department on February 4 clarified that the Budget proposal of 10 percent tax deduction at source (TDS) will be applicable only on dividend payment by mutual funds and not on gain arising out of redemption of units or capital gains.

Finance Minister Nirmala Sitharaman had in Budget 2020-21 scrapped dividend distribution tax (DDT) paid by companies and mutual funds on dividend paid to shareholders or unit holders.

In place, it was proposed to levy tax deducted at source (TDS) of 10 percent on dividend/income paid by a company or mutual fund to its share/unit holder if the amount of such dividend/income exceeds Rs 5,000 in a year.

In a statement, the Central Board of Direct Taxes (CBDT) said queries have been raised if 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," it said.

It went on to state that necessary clarification, if required, shall be proposed in the relevant provision of the law.