Dividend is one of the ways you earn from investments. Dividend is a property of Financial Assets. A physical asset like land, farmhouse or gold will never distribute dividends. But like most of the gains, the dividend is also taxed especially. From April 1, 2020, the Taxation on Mutual Fund Dividends has again changed. This article focus on taxation on dividends received from Indian mutual funds. Here is an account of how things have changed –
Taxation on Mutual Fund Dividends under Old Tax Regime (Applicable till FY 2019-20)
Dividend income received from Mutual Funds was 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’). Mutual Fund is required to deduct dividend distribution tax (‘DDT’) on the amount of dividends under section 115R of the Act. The rate of DDT was:
Taxation on Mutual Fund Dividends – New Tax Regime (Applicable for FY 2020-21)
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.
The new tax regime shall apply from April 1, 2020.
Which Type of Schemes will be covered in taxation on mutual fund dividends?
All types of Mutual Fund schemes are covered under the new tax regime. Both Dividend Payout & Dividend Reinvestment scheme will qualify for TDS. Both Regular & Direct Plans will have this taxation. All category of investors (Individual, NRI, Minor, Company. HUF, Trusts, etc) come under this regime
Will there be Deduction of TDS on Mutual Funds dividends?
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.
In the case of Dividend declared under the dividend reinvestment option, shall also be deemed as dividend paid and accordingly, Tax & TDS provision shall apply.
At what Rate TDS on dividend will be deducted for residents?
For other investments (like FD)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.
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, due to practical difficulties in mutual fund investments, the Mutual Fund company shall deduct TDS from each dividend declared – even without reaching the INR 5,000 threshold.
TDS rate to resident unitholders- 10%.
TDS rate to a non-resident (NRI) 20% (plus applicable surcharge and cess)…
Also note – TDS rates on special cases
If unitholder has not registered PAN in the folio
- Resident: 20%
- Non-resident: 20% (plus applicable surcharge and cess)
Minor
As per section 64(1A) of Act, the 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.
Can NRI avail tax treaty (DTAA) benefit
Yes, a 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 the relevant tax treaty, if any, subject to eligibility and compliance with applicable conditions.
Can you get a Refund of TDS?
In case of total TDS exceeding the actual tax liability of any investor (including NRIs), he/she can claim a refund while filing income tax return.
The TDS Certificate shall be generated on the TRACES portal by the Mutual Fund and issued to the unitholders every quarter as specified under the law.
Can an Investor avoid TDS under Dividend Distribution by MFs?
There are 2 ways to do this:
A. 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.
B. Unitholder can submit Form No. 15G or 15H for no TDS deduction
A person (not being a company or firm) can submit Form No. 15G or Form 15H to Mutual Fund for non-deduction of TDS.
The form needs to be submitted on an annual basis at the start of the financial year at any of the Official Points of Acceptance.
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