Ten per cent TDS on your mutual fund income

In her entire Budget speech, Finance Minister Nirmala Sitharaman, did not utter a single word on mutual fund, however, buried in Finance Bill 2020, is a proposal to insert section 194K in clause 80 to tax MF returns. The proposed section seeks to levy 10 per cent Tax Deducted at Source (TDS) from mutual funds’ income. Fund houses may have to deduct 10 per cent if the income from mutual funds unit is over Rs 5,000. This is done with an intention to bring mutual fund income at par with bank fixed deposits, where TDS is applied.

Till now, the mutual fund used to pay Dividend Distribution Tax (DDT) of 11.648 per cent on equity funds and 29.12 per cent on debt funds. Nonetheless, with the return of a classic system of taxing dividend, it is now investors or unit holder’s chance to pay the tax. 

Returning to the classic system will benefit investors who fall in the lower tax bracket and have invested in the debt funds. Earlier, mutual fund houses were paying 29.12 per cent, despite the investor falling in the 10 per cent or 20 per cent tax bracket. Now, such investors would be benefitted by this new system as they will have to pay lower taxes. Nevertheless, for investors lying in a higher tax bracket of 30 per cent will have to pay taxes at a higher rate.

In case of equity investors, only those investors will benefit, who do not have to pay taxes as they can claim the refund while filing an income tax return. In all other scenarios, equity mutual fund investor will now have to pay a higher tax.

Hence from the start of the next financial year, be ready to pay extra on every dividend you receive from mutual fund investment.  This may be a dampener for ‘dividend’ options of mutual fund schemes. As an investor, it is now prudent to opt for Systematic Withdrawal Plan (SWP) that might be more tax-efficient if one opts for withdrawing after one year in an equity fund and three years in case of debt fund.