The budget proposes for the abolition of Dividend Distribution Tax (DDT) paid by companies and mutual funds on dividends distributed to investors. On the same lines, the Budget 2020 also proposes to withdraw tax exemption claimed by investors on dividend income distributed. Instead, the budget imposes a liability to deduct tax (TDS) on dividend credited or paid to investors. However, in the case of dividend distributed by mutual funds, there was a confusion on whether the TDS would also cover redemption proceeds paid mutual funds.
CBDT (Central Board of Direct Taxes) has clarified that the TDS will be deducted only on dividend payments by mutual funds. The TDS will not apply to the redemption of units and on the payment of redemption proceeds by mutual funds. The income on the redemption of units is taxable as capital gains. The gains or losses are taxed or allowed in the hands of the investor.
Consequent to the withdrawal of DDT, the budget proposes a TDS of 10% on dividends distributed above Rs 5,000 to an investor in a financial year. The TDS applies to distributions made by domestic companies and mutual funds on or after 1 April 2020. An investor receiving the dividend income can also claim the credit for TDS while filing their income tax return.
The CBDT has also mentioned that any clarification, if necessary, will be made in the budget proposals.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.