Taxation of dividends received from mutual funds

In the light of the Union Budget 2020

KORAH AND KORAH, CHARTERED ACCOUNTANTS

Up to FY 2019-20, what was the tax treatment of dividends received from Mutual Funds in the hands of a unitholder?

• Exemptin the hands of the unitholders (resident as well as non-resident) under Section 10(35) of the Income-tax Act, 1961.
• However, the Mutual Fund was required to pay dividend distribution tax (‘DDT’) on the amount of dividend under Section 115R

Up to FY 2019-20, what was the amount of DDT payable by Mutual Funds?

• The Mutual Fund was required to pay a DDT under Section 115Rof the Act at the following rates (excluding surcharge and cess) –.

*In the case of Infrastructure Debt Fund, the rate was 5%

As per the Finance Act 2020, how has this taxation changed?

• Removed the levy of DDT in the hands of the Mutual Fund (i.e. equity oriented and other than equity oriented mutual fund schemes under dividend pay-out and dividend reinvestment options).
• The dividend shall now be taxed only in the hands of the unitholders at applicable tax rates provided under the Act.
• The new tax regime shall be applicable e.f. April 1, 2020 and will apply from FY 2020-21.

What would be the TDS provisions from FY 2020-21 onwards on dividends paid by Mutual Funds to unitholders?

• Resident Unitholders:
  Mutual Funds shall be required to deduct tax at source (‘TDS’) as per Section 194K of the Act at the rate of 10%on dividend income credited / paid to resident unitholders.
• TDS provisions should not apply in case where the amount of dividend credited / paid does not exceed the threshold limit i.e. INR 5000 in aggregate in a particular financial year. (The threshold limit is to be computed at the PAN level)
• The dividend reinvested under the dividend reinvestment option shall be deemed as dividend paid and accordingly, TDS provision shall apply.

Non-Resident Unitholders:

• As per Section 196Aof 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.
• There is no threshold limit applicable in case of dividend income credited / paid to non-resident unitholders.
• Also, 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.

Some other points related to TDS:

• In case PAN of the unitholder is not available, TDS shall be deducted at 20%(plus applicable surcharge and cess) for both Residents & Non-residents.
• In case of dividend payments to a minor, the parent should provide a declaration under to the Mutual Fund for TDS deduction under the PAN of the parent. (In the absence of such a declaration, TDS shall be deducted on dividend credited / paid under the PAN of the minor)
• 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.
• 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.