Budget 2020: TDS of 10% on your mutual fund dividends from April 1; clarifies on cost and holding period for segregated units

Tax will be deducted at 10% for dividends above Rs 5,000 in a year received by an MF investor; Budget also clarifies on taxation of segregated units

Kumar Shankar Roy Feb 2, 2020

TDS on mutual funds Budget 2020The abolition of dividend distribution tax (DDT) and shifting of taxability in the hands of dividend receiver may just not lead to significant outgo for investors, but also tax deducted at source (TDS). Yes, TDS will be deducted at 10% for dividends above Rs 5,000 in a year. The low threshold of Rs 5,000 means that many investors will see their dividends getting reduced due to TDS. Of course, you can get the TDS refunded when you file the income tax return based on your tax liability.

“…amend section 194 to include dividend for tax deduction. At the same time the rates of 10% is proposed to be prescribed and threshold is proposed to be increased from Rs 2,500/- to Rs 5,000/- for dividend paid other than cash. Further, at present the mode of payment is given as “an account payee cheque or warrant”. It is proposed to change this to any mode,” a budget document said. This will take effect from 1st April, 2020.

Currently, mutual funds are liable to pay DDT of 11.648% on equity funds and 29.12% on debt funds. Now, the dividends will be taxed at the investor end, but TDS at 10% will be deducted on payments over Rs 5,000 in a year.

Capital gains on segregated units

Meanwhile, segregated MF units (in side pockets) have been proposed to be not taxed fully. Before Budget 2020, there was a lack of clarity on the capital gains tax treatment upon the sale of units in the main scheme (with healthy portfolio) and the segregated portfolio (containing stressed assets) in the hands of the unit holder. In the absence of an amendment in the Income Tax Act, the holding period with respect to the sale of segregated units can be reckoned from the date of segregation, instead of the original date of acquisition of units in the main scheme.

“In view of the above, it is proposed to amend sub-section (42A) of section 2 of the Act to provide that in the case of a capital asset, being a unit or units in a segregated portfolio, referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee,” said the budget document.

There was also a lack of clarity on the cost of acquisition of units in the main scheme and segregated portfolio. In the absence of taxation clarity, the cost of acquisition in the main scheme can be taken as the original cost of acquisition, instead of the proportionate cost as determined on the date of segregation for the main scheme and for the segregated portfolio. That confusion is now over.

“Further, a new sub-section (2AG) is proposed to be inserted in section 49 of the Act to provide that the cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios,” the budget document said.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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