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.

TDS on Mutual Fund dividends applies to dividend payments; no TDS required on capital gains on redemption. The Finance Bill proposes removal of Dividend Distribution Tax, shifting dividend taxation to shareholders and requiring payers to deduct TDS on dividend payments above the statutory threshold. The CBDT clarifies that a Mutual Fund must deduct TDS only on dividend payments at the prescribed rate and is not required to deduct tax on income that is capital gains on redemption of units.