Amfi seeks clarification from tax authorities on removal of DDT, TDS introduction

New Delhi: Industry body Amfi has sought clarification from relevant tax authorities with regard to the government's plan to scrap dividend distribution tax (DDT) on mutual funds and introduction of tax deducted at source on the income distributed by such products, fund managers and officials have said.

Industry experts believe that the government's plan to tax dividend at the hands of investors could make dividend plans in equity and balanced schemes unattractive and investors may move towards growth plans.

In addition, long-term investment plans such as equity-linked saving schemes and retirement products will be impacted too as the proposed tax regime has no deduction available.

Finance Minister Nirmala Sitharaman in the Union Budget 2020-21 has proposed to abolish dividend distribution tax (DDT) on the dividend declared by companies and mutual funds to shareholders or unit holders.

Once the DDT is abolished, the dividend amount will be added to investors' taxable income and taxed as per the individual tax bracket.

Currently, mutual funds deduct the DDT and then hand over dividend to the unit holders.

In addition, the minister introduced a 10 per cent TDS (tax deducted at source) provision on the income distributed by a mutual fund to its unit holders if such income exceeds Rs 5,000.

The minister proposed the insertion of a new Section -- 194K -- in the Income Tax Act, which states "any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of 10 per cent of such income", according to the Finance Bill 2020.

The tax department on Tuesday clarified that the Budget proposal of 10 per cent TDS will be applicable only on dividend payment by mutual funds and not on gain arising out of redemption of units.

In a statement, the Central Board of Direct Taxes (CBDT) said queries have been raised if mutual fund would be required to deduct TDS also on the capital gains arising on redemption of units.

"It is hereby clarified that under the proposed section, a mutual fund shall be required to deduct TDS at 10 per cent only on dividend payment and no tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains," it said.

It went on to state that necessary clarification, if required, shall be proposed in the relevant provision of the law.

Samco Head (RankMF) Omkeshwar Singh said a TDS of 10 per cent has been introduced under new Section 194K for a payout of Rs 5,000 and above, however it is not clear if it considers only dividend or capital gains as well.

"Industry body Amfi has sought formal clarifications from relevant tax authorities since TDS on long-term capital gains for equities is exempted up to Rs 1 lakh," he said.

"We would need to wait for more clarification on this subject. Further, the new proposed tax regime has no deductions available under 80C, which was being used by governments to encourage long-term investment-cum-savings, that (ELSS or retirement) may get adversely impacted," he added.

Several industry officials also said the Association of Mutual Funds in India (Amfi) has sought clarification from relevant tax authorities in this regard.

"With the removal of DDT on mutual funds, dividend income from mutual funds is now taxable in the hands of the investors at their relevant tax slabs (subject to a 10 per cent TDS)," said Kaustubh Belapurkar, director, manager (research), Morningstar.

"We think this will make dividend plans in equity and balanced plans unattractive from a tax perspective for investors in the higher tax brackets as investors in a growth plan are liable to pay a LTCG (long-term capital gains) of 10 per cent," he added.

Naveen Kukreja, CEO and co-founder of Paisabazaar.com said, "The government's move will positively impact a small segment of individual investors, who are not in the highest tax slab and were investing in the fixed income instruments under the dividend option," said

Abhishek Bansal, Chairman and MD, Abans Group of Companies, said the proposal is a positive move.

"Earlier, DDT was levied twice, first when a company would pay a dividend to an asset management company (AMC), second when the AMC would declare its annual profits. These year-end profits declared by the AMC could be availed of in two ways by the investor who is a customer of the AMC: Either the investor could take the gains out as a dividend or it could be invested back into the fund. If the investor took the dividend route, he would need to pay DDT again," he said.

"This has now been replaced by a single simplified tax in terms of the abolishment of DDT and 10 per cent TDS to be applied by the AMC to its investors. This is hence a positive move," he added.

Bansal said that now, the quantum of savings that would result because of this step needs some clarification from the government on whether TDS is to be cut on the income component or on the entire proceedings. Clarification on the same will surely be available over the next few days as the industry has requested clarity on the same.