While there was relief among the corporate entities on the scrapping of the dividend distribution tax (DDT) at the hands of the companies paying out dividends to their shareholders, there was widespread confusion on another provision. The budget speech by Finance Minister Nirmala Sitharaman included a new provision by which Mutual Funds paying dividends will deduct 10% TDS before making the payments to the unit holders. The doubt being raised was if this 10% TDS clause applied to the payments being made at the time of redemption of the units by the investors in Mutual Funds if there is any capital gain. The government has come out with a clarification that this is not the case and that the TDS deduction will apply only to the dividend payouts.
It has to be added that this 10% TDS will be applicable if the dividend being paid is above ₹5,000. The government may make this clear in the relevant provision of the law before it gets gazetted, so that the confusion is removed once and for all.
The government clarification states: "The Finance Bill, 2020 proposed to remove Dividend Distribution Tax (DDT) at the level of Company/ Mutual Fund and proposed to tax the same in the hands of share/unit holder. It was also proposed to levy TDS at the rate of 10% on the dividend/ income paid by the Company/Mutual Fund to its share/unit holder if the amount of such dividend/ income exceeds five thousand rupees in a Financial Year."
Queries have been received to the effect that whether under the proposed section 194K, the Mutual Fund would be required to deduct TDS also on the capital gains arising on redemption of units. It is hereby clarified that under the proposed section, a Mutual Fund shall be required to deduct TDS @ 10% only on dividend payment and no tax shall be required to be deducted by the Mutual Fund on income which is in the nature of capital gains. Necessary clarification, if required, shall be proposed in the relevant provision of the law.