With effect from 01-04-2020, the Finance Bill, 2020
proposed to abolish the Dividend Distribution Tax and move to the traditional
system of taxation wherein mutual funds do not pay tax on distributed income
and, the unit-holders are liable to pay
tax on such income at the applicable tax rate. To ensure the collection of tax,
a new Section 194K has been proposed to be introduced which require the Mutual
Funds to deduct tax at the rate of 10% while making payment of income to the unit-holders.
The stakeholders had raised doubts about the deduction
of tax from the capital gains that may arise on maturity or transfer of mutual
funds, which the CBDT vide Press
release, dated 04-02-2020, has clarified that the tax under this provision is
required to be deducted only from the dividend payment. No tax is required to
be deducted from the sum payable which is in the nature of capital gains.
To remove any ambiguity, section 194K explicitly
provides that no tax shall be deducted while making payment in respect of
capital gain arising from transfer from units.
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