In the Finance Bill 2020 lies a hidden shocker for mutual fund investors. Those enjoying returns from mutual funds (MF) will now find their dividend amounts getting slimmer as the Union Budget 2020-21 has introduced a ‘tax deducted at source’ (TDS) on income from mutual funds if it is in excess of Rs 5,000.

The government has proposed to insert Section 194K in Clause 80 to tax MF returns.

Tax officials claim that the move was proposed to keep the treatment of MFs at par with bank fixed deposit where tax is already deducted at source. They also believe that it will curb under-reporting.

However, experts say that the provision is a dampener and it would leave less cash in the hands of investors.

Apart from salaried income, TDS on income from mutual funds would be 10%.

‘Earlier, an individual taxpayer was required to pay tax on the dividend at 10% only in case the dividend received from Indian companies was more than Rs 10 lakh, and no tax was payable in case of dividends received from mutual funds,’ said Shalini Jain, tax partner, EY India was reported saying by The New Indian Express

The Economic Times stated the summarised opinion of the experts they spoke to: ‘This TDS levy would be applicable to capital gains from mutual funds also and needs a suitable clarification from the government in case this is not the intention.’

While speaking to The Economic Times, Divya Baweja, Partner at Deloitte India said: ‘Budget 2020 has proposed to charge taxes on income distributed by mutual funds to its unit holders. The new Section 194K proposed in this budget provides that any person responsible for paying to a resident unit holder, any income in respect of units of a mutual fund specified under Section 10(23D) or units from the administrator of the specified undertaking or units from the specified company, is required to withhold tax at the rate of 10 percent.

‘On a plain reading, the proposed amendment requires deduction of tax on any income paid by Mutual Fund to residents. Definition of ‘income’ under Section 2(24) also includes capital gains. Therefore, if the provisions of the new Section 194K are not clarified, then TDS shall also become applicable to capital gains (including long term and short term capital gains) from mutual fund units,’ Baweja said.

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