TDS cut to benefit investors in equity mutual fund dividend plans

Investors in dividend plans of equity mutual funds will benefit from the 25% cut in the rates for tax deducted at source (TDS) announced by finance minister Nirmala Sitharaman on 13th May 2020.

Tax experts said mutual funds are currently required to deduct a 10% TDS on dividends paid to unit holders. For the remainder of FY 2021 this will come down to 7.5%. The lower rates will come into effect from May 14 and include deductions on dividend, interest, professional fees and brokerage.

Investors who route money through alternative investment funds (AIFs), real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), too would get the benefit of the lower TDS rate, say experts. REITs and InvITs are taxed in the same manner as debt instruments.

The government had made dividends taxable in the hands of investors in the budget for FY 2021.

“The unit holders will get the benefit of reduction of TDS on the dividend declared by mutual funds. This benefit will be enjoyed by all class of resident investors.”

A section of debt market investors will see higher returns as interest income has also been covered under the proposal. Any individual investor or trusts earning interest on corporate bonds and non-convertible debentures (NCDs) are currently subject to TDS at 20%. For the rest of FY21, they can pay 15%.

However, the benefit will be applicable only on direct investments in debt instruments and not through a mutual fund. This is because debt MFs don’t cut any TDS on distributed income.

“The decision temporarily helps, as for time being, it will leave more cash in the hands of resident investors which may be deployed to generate additional returns until the taxes are finally discharged.”

To be sure, the benefit of lower TDS can be availed of only by residents, implying that foreign portfolio investors (FPIs) and non-resident Indians (NRIs) will not be eligible for this benefit.

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