Recent Changes in Taxation of Dividend from Mutual Funds

Currently, a 10% dividend distribution tax (DDT) is paid by equity oriented mutual funds and dividends are tax free in the hands of the investors. Finance Act, 2020 has scrapped the Dividend Distribution Tax (DDT) paid by the Mutual Funds on dividend paid to unit holders. However, any dividend income (pay out / reinvestment) has been made taxable in the hands of unitholders from 1st April 2020

In this regard, please find attached herewith a detailed note form HDFC AMC. Please go through the note in detail.

Some of the Salient features of the note are:

Mutual Fund Investor is liable to pay tax on Dividend Income from mutual funds (whether paid or reinvested) at applicable tax rates to him TDS @ 10% (for resident individual) will be deducted from the Dividend Income. Even though TDS is applicable over 5000 aggregate dividend income, in absence of proper information, TDS will be deducted on entire dividend paid by AMC (As per HDFC AMC note and we assume every AMC will follow it) If PAN is not registered in the Mutual Fund folio, then TDS on Dividend Income will be deducted @ 20%. In case of NRIs, TDS for on the Dividend Income will be deducted at 20% If the total income of an Investor (not being a company or firm) does not fall under taxable limit, then he/she can provide Form 15 G for non-deduction of TDS

Our Suggestions:

If the tax slab of an Investor is 10% or higher, then the investor should shift from Dividend Option to Growth Option. It is advisable to check the Taxation impact before the shifting. Security Transaction Tax (STT) @ 0.001%will be levied at the time of shifting from Dividend to Growth option. If an Investor requires regular Income, then he should consider Systematic Withdrawal Plan (SWP) in the Growth Option. Any Gain/Loss arising out of SWP will fall under the head Capital Gains. Please note that Long term capital gains accrued from the sale of equity shares and equity-oriented mutual funds are exempt from tax up to Rs 1 lakh in a financial year. The gains in excess of Rs 1 lakh are taxed at flat 10%.

Disclaimer: The above email is prepared for the purpose of information sharing with the clients. It does not constitute Taxation Advice. You are requested to consult your Tax Consultant before making any decision.