Union Budget 2020 Proposes to Levy 10% TDS on Capital Gains from Mutual Funds

The Union Budget has introduced a 10% deduction of tax on income from mutual funds if it exceeds Rs 5,000 per year from April 2020.

The Finance Bill 2020 proposes to insert Section 194K in Clause 80 that reads: “(i) units of a Mutual Fund specified under clause (23D) of section 10; or (ii) units from the Administrator of the specified undertaking; or (iii) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.”.

That basically means TDS (tax deducted at source) will be applicable on income derived from specified mutual funds at the rate of 10% (if the income exceeds Rs 5,000). Income includes both dividends and capital gains on mutual funds. Therefore, it can be assumed that TDS would be applicable on both dividend income and capital gains income from mutual funds.

Currently, TDS on capital gains is deducted only for NRI investors in mutual funds and not for resident Indians. Resident Indians are required to pay taxes on a self-assessment basis.

Some experts believe that the income from mutual funds in Section 194K might just mean dividend income since the government has abolished the dividend distribution tax (DDT), passing the tax payment burden on the recipient of income. But a government clarification would be necessary in that regards. Earlier, dividend income from mutual funds was exempt in the hands of receiver. However, as per the proposals of Union Budget 2020, dividends from mutual funds would now be added to the taxpayers’ income and taxed according to the slab applicable to them.

A section of experts, meanwhile, believes that the move to levy TDS on capital gains from mutual funds might be intentional in order to keep MFs and bank fixed deposit at par. Cutting TDS will also help the Income-Tax department to gather information on gains accrued by a taxpayer through mutual funds. Moreover, this will further facilitate the I-T department in achieving the goal of pre-filled ITRs (income-tax returns) for taxpayers.