Tax

TDS on Income from Mutual Fund - Budget 2020

By CA Mangal (CA Mangal) • Published: 06-03-2020

TDS on Income from Mutual Fund - Budget 2020

The Union Budget 2020 introduced Tax Deducted at Source (TDS) provisions on dividend income from mutual funds, effective from April 1, 2020. This change is part of the broader shift in dividend taxation from company-level (DDT) to shareholder-level taxation.

Overview

Budget 2020 brought significant changes to how dividends from mutual funds are taxed:

  • Abolition of Dividend Distribution Tax (DDT) at the mutual fund level
  • Introduction of TDS on dividend payments to investors
  • Dividend income now taxable in the hands of investors

Key Provisions

1. TDS on Mutual Fund Dividends

Applicability:

  • TDS of 10% is applicable on dividend income from mutual funds
  • Applies to dividend payments exceeding ₹5,000 in a financial year
  • Effective from April 1, 2020
Who Deducts TDS:
  • Mutual fund houses (Asset Management Companies)
  • TDS is deducted at the time of dividend payment
Threshold:
  • TDS applicable only if dividend exceeds ₹5,000 in a financial year
  • Aggregate of all dividends from mutual funds considered

2. COVID-19 Relief Measure

Reduced TDS Rate:

  • As a COVID-19 relief measure, TDS rate was reduced to 7.5% for dividends distributed between May 14, 2020, and March 31, 2021
  • This temporary reduction provided relief during the pandemic

TDS Rates

| Period | TDS Rate | Threshold | |--------|----------|-----------| | April 1, 2020 - May 13, 2020 | 10% | Above ₹5,000 per FY | | May 14, 2020 - March 31, 2021 | 7.5% | Above ₹5,000 per FY | | April 1, 2021 onwards | 10% | Above ₹5,000 per FY |

Impact on Investors

For Resident Individual Investors

  • Below ₹5,000: No TDS applicable
  • Above ₹5,000: TDS deducted at 10% (or 7.5% during relief period)
  • Taxable Income: Dividend income added to total income
  • Credit Available: TDS can be claimed as credit while filing ITR
  • Tax Slab: Taxed at applicable income tax slab rates

For Senior Citizens

  • Form 15H: Can submit Form 15H to avoid TDS if estimated annual income is below exemption limit
  • No TDS: If Form 15H submitted and income below exemption limit

For Non-Resident Investors

  • Higher TDS: May be subject to higher TDS rates
  • Treaty Benefits: Can claim lower rates under DTAA if applicable
  • Credit: Can claim credit in home country

Form 15G/15H

Eligibility for Form 15G

  • Resident individuals (not senior citizens)
  • Estimated annual income below exemption limit
  • Age below 60 years
  • Can submit to mutual fund to avoid TDS

Eligibility for Form 15H

  • Senior citizens (age 60 years or above)
  • Estimated annual income below exemption limit
  • Can submit to mutual fund to avoid TDS

Credit and Refund Mechanism

Claiming TDS Credit

1. Form 26AS: TDS details will appear in Form 26AS 2. ITR Filing: Credit can be claimed while filing Income Tax Return 3. Verification: Ensure TDS certificate is obtained from mutual fund 4. Refund: If tax liability is less than TDS, excess can be refunded

TDS Certificate

  • Mutual fund must issue TDS certificate (Form 16A)
  • Certificate contains details of TDS deducted
  • Required for claiming credit in ITR

Important Considerations

1. Threshold: ₹5,000 threshold applies per financial year 2. Aggregate: All dividends from mutual funds aggregated for threshold 3. Form 15G/15H: Submit to avoid TDS if eligible 4. Documentation: Maintain proper records of all dividend income 5. Compliance: Ensure proper TDS credit in ITR

Planning Tips

1. Track Dividends: Keep track of total dividend income in a financial year 2. Submit Forms: Submit Form 15G/15H if eligible to avoid TDS 3. Claim Credit: Ensure proper credit of TDS in ITR 4. Documentation: Maintain all TDS certificates and documents 5. Professional Advice: Consult CA for tax planning

Comparison with Previous Regime

| Aspect | Old Regime (DDT) | New Regime (Budget 2020) | |--------|------------------|-------------------------| | Taxation Point | Mutual fund level | Investor level | | Tax Rate | DDT @ 15% + surcharge + cess | Normal tax rates + TDS | | TDS | Not applicable | 10% (or 7.5% during relief) | | Tax Credit | Not available | Available for investors | | Form 15G/15H | Not applicable | Can be submitted |

Key Takeaways

1. 10% TDS on mutual fund dividends above ₹5,000 per FY 2. 7.5% TDS during COVID-19 relief period (May 14, 2020 - March 31, 2021) 3. Credit Available: TDS can be claimed as credit in ITR 4. Form 15G/15H: Can be submitted to avoid TDS if eligible 5. Taxable Income: Dividend income added to total income and taxed at slab rates

Conclusion

The TDS provisions on mutual fund dividends introduced in Budget 2020 shift the tax burden from mutual funds to investors. While this increases compliance requirements, investors can claim credit of TDS against their tax liability. Understanding these provisions helps in proper tax planning and compliance.

For personalized guidance on TDS provisions, mutual fund investments, and tax planning, consult with a qualified Chartered Accountant who can help you navigate these provisions effectively.