Finance minister Nirmala Sitharaman announced a 25% cut in the rates for tax deducted at source for investors who have invested in dividend plans of equity mutual funds.
As per tax experts, mutual funds are currently required to deduct 10% TDS on the dividend paid. For the remaining part of the year, the figure will be brought down to 7.5%. This reduced rate comes into effect from May 14.
Investors who have routed money through alternative investment funds, real estate investment trusts, or infrastructure trusts would also be getting the benefit of a lower TDS rate since these are taxed in the same manner as debt instruments.
Unitholders will get advantages of the reduction of TDS on the dividend that is declared by mutual funds. And these benefits will be enjoyed by all class of resident investors. Some debt market investors will also see higher returns since the interest income is also covered under the proposal. Individual investors/ trusts who are earning interest on corporate bonds/non-convertible debentures are subject to a 20% TDS at the present. For the remaining FY21, this will be 15%. However, this advantage applies only on direct investments that are made in debt instruments, and not through mutual funds. This is because mutual funds don’t cut any TDS on distributed income.
The decision will be of great relief since for the time being, it will leave more cash in the hands of resident investors. These funds can then be deployed to generate additional returns till taxes are finally discharged.
The benefit of lower TDS can be availed only residents of the country. Foreign portfolio investors are non-resident Indians will not be able to benefit from this measure.