Govt goes TDS; 10% of mutual fund income; 5% on package tours

Money flowing out of India in the form of remittances or travel to be taxed

Agency Report | New Delhi | 4 February, 2020 | 11:40 PM

Investing in mutual funds may become less attractive as the government has proposed a tax on the income distributed by asset managers to unitholders.

Finance Minister Nirmala Sitharaman in the Union Budget for 2020-21 has introduced a 10 per cent TDS (tax deducted at source) provision on the income distributed by a mutual fund to its unitholders if such income exceeds Rs 5,000.

The Finance Bill, 2020, has proposed the insertion of a new section — 194K — in the Income Tax Act, which states “any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of ten percent of such income”.

It is not clear if the gains will be taxed or the entire redemption amount made by the unitholders will be taxed at source.

Mutual fund income over Rs 5,000 will now be subject to 10 per cent tax deducted at source (TDS), according to a proposal by the Ministry of Finance under the Union Budget 2020.

“After Section 194J of the Income Tax Act, the following section shall be inserted, namely:– 194K: Any person responsible for paying to a resident any income in respect of (a) units of a mutual fund specified under Clause (23D) of Section 10; or (b) units from the Administrator of the specified undertaking; or (c) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of 10 per cent,” the Finance Bill read.

According to Section 194K, any “resident” deriving an “income” from mutual funds, specified under Section 10 Clause (23D), will be subject to have a 10 per cent TDS.

Before the clause was introduced, TDS on mutual funds was deducted for NRI investors and not residents.

Earlier, only dividend income on mutual funds exceeding Rs 1 lakh was taxed at 10 per cent. Unless a clarification is issued, the new tax proposal will apply to capital gains from mutual funds as well. This is because the definition of “income” under the existing Income Tax Act as per Section 2 also includes “profit and gains”.

Money flowing out of India is being taxed with tax deduction at source added on services like foreign tour packages and remittances as the outgoing funds’ flow is sought to being taxed.

The Budget 2020-21 has mandated a 5 per cent tax collection at source for remittances over Rs 7 lakh.

Mohandas Pai, Chairman, Aarin Capital has criticised the TDS on foreign remittances. He said: “This is very wrong; Why is there a Tax on our own tax paid money when we remit? Where is the ease of living?.”

Directionally, it looks like that money flowing out of India is being taxed in the form of remittances or travel. Some people have said that they will make the remittances for education by March 31 as the provision kicks in from April 1.

A new TDS provision has been introduced on foreign remittance. Authorized foreign exchange dealer receiving an amount of Rs 7 lakh or more in a financial year for remittance out of India under the LRS scheme of the RBI shall collect TCS (tax at source) of 5 per cent from the buyer, being a person remitting such amounts out of India. In the case of non PAN/Aadhar cases, the rate is 10 per cent.

LRS is used for sending money for children studying abroad, buying property abroad and buying stocks listed in exchanges abroad. The LRS is limited to $250,000 per year per person. On sending more than Rs 7 lakh year, 5 per cent of that amount will be deducted by the FX dealer and paid as TCS to the Income-tax department.

A TDS provision has been introduced on tour packages also. The seller of overseas tour packages shall collect TCS of 5 per cent from the buyer.

The provision will not apply in case the operator is liable to deduct tax at source under any other provision of the act and the amount has been deducted. It will also not apply if the buyer is the government or any other person notified by the government

There is no lower limit on this provision. Travel operators are cribbing that this will hurt their business. (IANS)