Finance Minister Nirmala Sitharaman had scrapped the Dividend Distribution Tax (DDT) in Budget 2020-21. Erstwhile DDT was paid by companies and Mutual Funds on dividend paid to shareholders and unitholders. In place of DDT, the FinMin had proposed to levy a 10% tax deducted at source (TDS) on dividend paid to shareholders or unitholders in case the annual dividend paid was higher than Rs.5000. This change led to confusion about the amount on which this 10% TDS is applicable. It was ambiguous if the 10% TDS applies only to the gains or on the entire redemption amount made by shareholders. The Association of Mutual Funds in India has also sought clarification on the proposed change.
In budget 2020-21, a new section 194 K was introduced in the Income Tax Act. The new section states that mutual funds or a specified company paying income which arises from units of mutual funds must deduct tax at source at the rate of 10% of such income.
The Central Board of Direct Taxes (CBDT) has issued a clarification on the new Tax. CBDT clarified that the new tax of 10% TDS is applicable only on the dividend payments by Mutual Funds, in case the annual dividend is more than Rs. 5000. CBDT further clarified that no tax will be deducted by Mutual Funds on income which is in the nature of capital gains. CBDT also stated that if the need arises, necessary clarifications will be proposed in the relevant provision of the law.