Amfi seeks clarification on DDT, TDS

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.