Association of Mutual Funds in India (Amfi) is set to write to the Union finance ministry and Securities and Exchange Board of India (Sebi) to seek a clarification on whether ‘income’ under Section 194K includes only dividend income or also has capital gains. The FM had announced on Saturday that 10% tax would be deducted at source (TDS) for income above `5,000 in a year. The FM in her Budget had abolished dividend distribution tax (DDT) and proposed to make dividend income taxable in the hands of investors.
Amfi CEO NS Venkatesh said, “Under the Section 194K, TDS will be levied on income, but as of now there is no clarity whether this income includes only dividends or capital gains. We will be writing a letter to the finance ministry and Sebi, asking to exempt capital gains from this section.” He added that they will also be asking TDS of 10% for income above `5,000 to be increased to `50,000 in a year.
According to Section 194K, any person responsible for paying to a resident any income in respect of units of a mutual fund specified under clause (23D) of Section 10 or units from the administrator of the specified undertaking or units from the specified company.
Earlier, dividends were tax free in the hands of investors as DDT by debt fund was 25% for individuals and Hindu Undivided Family (HUF) and 30% for others. After grossing up and including surcharge and cess this comes to 38.33% and 49.92%, respectively. While DDT for equity oriented funds was 11.64% (which includes surcharge and cess).
According to the market participants, if the amount of dividend is less than `5,000 mutual fund will not withhold anything but if it’s more than `5,000 they will withhold 10%. For example, if an investor gets a dividend of `20,000 in a year, `18,000 (10% of `20,000) will be credited to his bank account and he will be able to claim credit of `2,000 for the tax withheld by the mutual fund while filing his personal tax return. “We believe that increasing the amount of TDS from `5,000 to `50,000 would lead to lower administrative work for both fund houses and investors,” Venkatesh added.