Mutual funds get dividend from companies. Is TDS deducted for the dividend paid to mutual funds? If yes, do mutual funds pass it on to customers?
Till FY19-20, companies deducted TDS (tax deducted at source) before paying dividends to mutual funds. Subsequently, mutual funds also had to pay a dividend distribution tax (DDT) on dividends passed on to investors, which were then tax-free in the hands of investors.
The Finance Act 2020 announced a change in taxation starting FY20-21. Now, companies do not have to deduct a TDS amount while paying dividend to investors including mutual funds.
Mutual funds, being pass through vehicles, do not have to pay any tax on dividends received. However, now all dividends received (from both equity and other-than-equity oriented schemes) are taxed in the hands of the investors, at the marginal rate of tax, as applicable.
Additionally, mutual funds are required to deduct TDS at 10% (excluding surcharge and cess) while distributing dividends exceeding Rs 5,000 to investors.
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