personal finance

Budget 2020: Dividends from mutual funds to be taxed at slab rate from April; TDS in


If you are a fan of dividends from mutual funds, be ready to pay more taxes on them from the next financial year. The finance Minister Nirmala Sitharaman proposed to change the current system of mutual funds paying the dividend distribution tax or DDT and move to the classical system of taxing dividend in the hands of the unit holders or investors.

“It is proposed to carry out amendments so that dividend or income from units are taxable in the hands of shareholders or unit holders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT,” she said. “The incidence of the tax should therefore, be on the recipient and not on the payer or the mutual fund,” the minister added.

Currently, mutual funds are liable to pay DDT of 11.648% on equity funds and 29.12% on debt funds, according to the tax reckoner by Tata Mutual Fund. Once the budget is passed, most investors to pay more taxes on these dividends, depending on their income tax slabs.

Mutual fund managers believe the new DDT rule would only benefit debt mutual fund investors in the lower tax brackets. It will hurt most investors in the higher tax slabs.

“Last time when they re-introduced DDT, it was taken very negatively. I think, the government wanted to reverse it. Depending on the tax bracket of the investors, we can determine how the change in DDT affect them. So, I think, a person who falls in the lower tax bracket will benefit but the person who is in a higher tax bracket will end up paying higher taxes,” says Jinesh Gopani, head- equities, Axis AMC
.

The proposed changes will only benefit debt mutual fund investors falling in the first two tax slabs of 10% and 20%. They will pay less than the current rate of 29.12% (25% + 12% surcharge + 4% cess) paid by mutual funds.

“The present system of taxation of dividend in the hands of mutual funds was reintroduced by the Finance Act, 2003 (with effect from the assessment year 2004-05) since it was easier to collect tax at a single point and the new system was leading to an increase in compliance burden,” adds the Finance Minister in her budget speech.

Mutual fund house will also deduct 10% tax at source before distributing the dividend over Rs 5,000.

The finance minister said in her budget speech said, “At the time of credit of such income (dividend income) to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax there on at the rate of ten per cent. It may also be provided for threshold limit of Rs 5,000 so that income below this amount does not suffer tax deduction.”

On a positive note, the new DDT rules would help mutual funds to focus on the growth option. Many mutual fund pundits scoff at the dividend option, as they believe dividend in a mutual fund scheme is nothing but selling a part of your investments in the scheme.





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