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The Finance Bill specifies persons responsible for paying “income” shall deduct taxes at the rate of 10%.
Mutual Funds will seek clarity from the tax department on whether the budget proposal asking asset managers to deduct taxes on “income” made by investors in schemes would extend to capital gains as well.
The Finance Bill specifies persons responsible for paying “income” shall deduct taxes at the rate of 10 percent. Mutual funds are confused whether the Tax Deducted at Source (TDS) on “income” would be restricted to dividends only or include capital gains.
Nilesh Shah, chairman of the Association of Mutual Fund of India (AMFI) confirmed that there is confusion over the interpretation of the proposed law and the industry will approach the tax department for clarity.
The budget introduced TDS for mutual funds. Currently, the onus of declaring capital gains for taxation lies with the investor or unitholders. Only banks and companies deduct tax on interest earned from deposits before passing on the rest of the income to holders. Dividends distributed by mutual funds would become subject to 10 percent TDS from the next financial year. This would be applicable for dividend income above Rs 5,000 in a financial year.
The industry is divided over the interpretation of the proposed rule. While some mutual fund industry officials believe the term “income” for the purpose of TDS refers to dividend income, a section believes that the TDS will be applicable to redemption proceeds irrespective of dividend income or capital gains.
The chief executive officer of a large mutual fund said the government may have used the Section 194K, which was meant for dividends from UTI monthly income schemes. “The original intention of Section 194K was meant for UTI monthly income schemes that declared a monthly income for investors. We feel it is this interpretation the government has used, and this does not refer to capital gains,” the MF CEO said.
Section 194K of the Incometax Act says, “Where any income is payable to a resident in respect of units of a mutual fund specified under clause (23D) of Section 10 or of the Unit Trust of India, the person responsible for making the payment shall, at the time of credit of such income to the account of payee-…deduct income-tax thereon at the rate of ten percent.”
“In the current regime, the onus of reporting dividend income and capital gains is on individual investors, while for NRIs it is deducted at source,” said Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Currently, on all mutual fund products, dividend income is tax-free in the hands of the investor, which will change from April 1.
Mutual fund industry officials said the new structure could make reporting for individuals tough, especially given that equity-oriented and debt-oriented funds have different slabs.
Also, if the individual’s income is not subject to tax, he needs to file for a refund. If he is in the 20-30 percent tax bracket, he needs to pay additional tax.
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