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.
[2] What is the date of applicability of the new tax regime?
The new tax regime is applicable from April 1, 2020 for FY 2020-21.
[3] What type of Mutual Fund schemes are covered?
All types of Mutual Fund schemes are covered under the new tax regime, i.e. equity oriented and other than equity oriented mutual fund schemes under dividend payout and dividend reinvestment options.
[4] How will dividend income be taxed in the hands of unitholders?
The dividend shall be taxed in the hands of the unitholders at applicable tax rates provided under the Income Tax Act,1961, for the category of the unitholders.
[5] When is TDS required to be deducted by the Mutual Fund?
TDS is required to be deducted at the time of payment of dividend or record date of dividend,whichever is earlier.
Note: The amount of dividend reinvested under the dividend reinvestment option shall be deemed as dividend paid and accordingly, TDS provision shall apply.
[6] What is the TDS rate on dividend income credited / paid to resident unitholders?
As per section 194K of the Act, TDS at the rate of 10% should be deducted on dividend income credited/paid to resident unitholders.
[7] What is the threshold limit for applicability of TDS on dividend credited/paid to resident unitholders?
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.
Note: 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, on account of practical difficulties involved due to unique nature of mutual fund investments and different schemes involved, Mutual Fund shall deduct TDS from each dividend declared i.e. even without reaching INR 5,000 threshold. In case of total TDS exceeding the actual tax liability of any investor, he/she can claim refund while filing income-tax return.
[8] What is the TDS rate on dividend income credited / paid to non-resident unitholders?
As per section 196A of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to non-resident unitholders (other than FII/FPI). There is no threshold limit applicable in case of dividend income credited / paid to non-resident unitholders.
Separately, as per section 196D of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to FII/FPI. There is no threshold limit applicable in case of dividend income credited / paid to FII/FPI.
[9] What is the TDS rate on dividend income in case unitholder has not registered PAN in the folio?
TDS shall be deducted at the following rates in case PAN of unitholder is not available:
• Resident: 20%
• Non-resident: 20% (plus applicable surcharge and cess)
[10] What is the applicability of TDS provisions in case of unitholder having a PAN Exempted KYC Reference Number (‘PEKRN’)?
There is no exemption provided from TDS provisions under the Act for a unitholder having a PEKRN. Accordingly, it will be considered as a case of PAN not available, and TDS shall be deducted as mentioned in point 9.
[11] What is the applicability of TDS provisions in case of dividend credited/paid to minor?
As per section 64(1A) of Act, 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.
[12] When will the Mutual Fund issue TDS Certificate?
The TDS Certificate shall be generated on the TRACES portal by the Mutual Fund and issued to the unitholders on a quarterly basis as specified under the law.
[13] Can a unitholder obtain a certificate from income-tax authorities for TDS deduction at a lower/nil rate?
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.
[14] Can a unitholder submit Form No. 15G for no TDS deduction?
A person (not being a company or firm) can submit Form No. 15G to Mutual Fund for non-deduction 0f TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.
It is recommended that the form should be submitted on an annual basis at the start of the financial year at any of the Official Points of Acceptance of Mutual Fund.
[15] Can a unitholder submit Form No. 15H for no TDS deduction?
A resident individual (aged 60 years or more) can submit Form No. 15H to Mutual Fund for non-deduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.
It is recommended that the form should be submitted on an annual basis at the start of the financial year at any of the Official Points of Acceptance of Mutual Fund.
[16] Can a non-resident unitholder avail tax treaty benefit on dividend income received from Mutual Fund?
As per the provisions of section(s) 196A/196D of the Act which is specifically applicable in case of non-resident unitholders/FII/FPI, the Mutual Fund shall have to deduct TDS at the rate of 20% (plus applicable surcharge and cess) on dividend income credited/paid to non-resident unitholders/FII/FPI, as section(s) 196A/196D of the Act do not make reference to “rates in force” but provide the withholding tax rate of 20% (plus applicable surcharge and cess).
The 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 relevant tax treaty, if any, subject to eligibility and compliance with applicable conditions.
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Tax on Short Term Capital Gains (STCG)
| |
Individual / HUF# |
Domestic Company$ |
NRI# |
Equity Oriented Schemes
(units held for 12 months or less)
|
15%+4% Cess |
15%+4% Cess |
15%+4% Cess |
=15.60% |
=15.60% |
=15.60% |
Eg: Tax on STCG of 1 Lakh (₨) |
15,200 |
15,200 |
15,200 |
|
Debt Oriented Schemes
(units held for 36 months or less )
|
30%^+4% Cess
|
30%^^+4% Cess
|
30%^+4% Cess
|
= 31.50% |
= 31.50% |
= 31.50% |
Eg: Tax on STCG of 1 Lakh (Rs) |
31,200 |
31,200 |
31,200 |
-
Tax on Long Term Capital Gains (LTCG)
| |
Individual/HUF# |
Domestic Company$ |
NRI# |
Equity Oriented Schemes##
(units held for more than 12 months)
|
10%+4% Cess |
10%+4% Cess |
10%+4% Cess |
=10.40% |
=10.40% |
=10.40% |
Debt Oriented Schemes
(units held for more than 36 months)
|
20%‡+4% Cess
|
20%‡+4% Cess
|
20%‡‡+4% Cess
|
=20.80% |
=20.80% |
=20.80% |
Illustration :Examples of Tax on Long Term Capital Gains/Loss arising form Equity Funds
| |
Scenario 1 |
Scenario 2 |
Scenario 3 |
Scenario 4 |
Scenario 5 |
Initial Investment:
Any time before 31st March 2017 (Rs)
|
5,00,000 |
5,00,000 |
5,00,000 |
5,00,000 |
5,00,000 |
Investment Value:(Grandfathered)
As of 31st January,2018 (Rs)
|
7,50,000 |
7,50,000 |
7,50,000 |
7,00,000 |
7,00,000 |
Redemption:2018 |
28th Mar |
2nd Apr |
2nd Apr |
2nd Apr |
2nd Apr |
Value on Redemption Date (Rs) |
8,00,000 |
8,00,000 |
9,00,000 |
6,50,000 |
4,00,000 |
Total Gain/Loss (Rs) |
3,00,000 |
3,00,000 |
4,00,000 |
1,50,000 |
-1,00,000 |
Taxable LTC Gain/ Loss&&
|
3,00,000 |
50,000 |
1,50,000 |
50,000 |
-1,00,000 |
Taxable LTC Gain exceeding Rs 100,000 from FY
2018-19 onwards
|
NA |
0 |
50,000 |
0 |
0 |
Tax on LTCG (Rs) |
Nil |
Nil |
5,200 |
Nil |
Nil |
&&Long-term capital loss arising from transfer made on or after 1st April , 2018 will be allowed set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains , subject to compliance of the conditions prescribed under IT Act & the Rules made thereunder.
The cost of acquisition for the long-term capital asset acquired on or before 31st of January , 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on 31st of January , 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher , will be deemed to be the cost of acquisition.
Illustration : Examples of Tax on Long Term Capital Gains from Debt Funds (LTCG)
| |
Scenario 1 |
Scenario 2 |
Bank Deposits^ |
Assumed Investment (Rs) |
10,00,000 |
10,00,000 |
10,00,000 |
Assumed Yield/ Interest Rate |
6% |
7% |
7% |
Indexed Value after 3 years (Rs) |
11,91,016 |
12,25,043 |
12,25,043 |
Indexed Cost of Acquisition@(Rs) |
11,57,625 |
11,57,625 |
– |
Taxable LTC Gain (Rs) |
33,391 |
67,418 |
2,25,043 |
Tax on LTC Gain (Rs) |
6,945 |
14,023 |
70,213 |
@After providing for inflation, Assumed inflation Rate at 5%
**Securities transaction tax (STT) shall be payable on equity oriented mutual funds schemes at the time of redemption/ switch to the other schemes / sale of units.
# Surcharge at 15% on base tax is applicable where net income of Individual / HUF unitholders exceeds Rs 1 cr and at 10% where net income exceeds Rs 50 Lakhs but does not exceed Rs 1 cr .
$Surcharge at 7% on base tax is applicable where net income of domestic corporate unit holders exceeds Rs 1 cr but does not exceed 10 crs and at 12% where net income exceeds 10 crs.
As per Finance Bill 2018, Education Cess at 3% shall be discontinued and cess called “Health and Education Cess” to be levied at a rate of 4% on aggregate of base tax and surcharge.
^Assuming the investor falls into highest tax bracket .
^^30& rate applies to companies other than companies engaged in manufacturing business who are taxed at lower rate subject to fulfilment of certain conditions. Further, 25% if total turnover or gross receipts during the financial year 2016-17 does not exceed Rs 250 crores.
## Finance Bill, 2018 proposes levy of income – tax at the rate of 10% (without indexation benefit) on long-term capital gains exceeding Rs 1 lakh provided transfer of such units is subject to STT.
‡After providing indexation ‡‡ Listed -20% after providing indexation, Unlisted -10%
Short term/long term capital gain tax ( along with applicable Sucharge and “ Health and Education Cess “) will be deducted at the time of redemption of units in case of NRI investors.
