Does the dividend received through Mutual funds are taxed?
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The dividend is a distribution of profits to shareholders by the company. Mutual funds dividends are generated by the Asset Management Companies by the Underlying Assets. The Asset Management Company earns this profit by selling the stocks at a higher price than the purchase price of these assets.
Mutual funds can provide earnings in two forms i.e. Capital Gains and Dividend. Capital Gains on mutual funds are taxable at different rates at the hands of the investors. Capital Gain on Mutual funds arises at the time of redemption of mutual funds and can be of two types i.e. Short Term and Long Term Capital Gains. The nature of Capital Gain is determined by the nature of fund and period of holding of investment in that particular fund. However, Security Transaction Tax is applicable to Equity Oriented Funds at the time of redemption.
Dividends on mutual funds are tax-free in the hands of Investors. There is a Dividend Distribution Tax (DDT), which is payable on these dividends by the Asset Management Companies. This Dividend Distribution Tax (DDT) reduces the in-hand return of Investors. The dividend income earned from a mutual fund is exempt u/s 10(35) of the Income Tax Act, 1961. While, Capital Gain arising on sale of mutual fund securities is only exempt to the extent of Rs.100,000/-, thereafter to be taxed at the rate of 15%.
For example: If you purchased some units at a cost of Rs.400,000 and you’ve sold them at a price of Rs.5,50,000. The amount of Capital Gain here is Rs.150,000 and the amount exempt is Rs.100,000, therefore, the taxable amount stands at Rs.50,000 and shall be taxed at the prescribed rate (15%).
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Now, a 10% Tax deducted at source (TDS) is applicable to dividends received from mutual funds. This came into being earlier this year during the Budget 2020. In the Finance Bill, 2020 the government abolished dividend distribution tax DDT.
In place, it was proposed to levy tax deducted at source (TDS) of 10% on dividend/income paid by a company or mutual fund to its share/unitholder if the amount of such dividend/income exceeds Rs5,000 in a year. This TDS will be levied only on dividend income and not the entire mutual fund income which comes under the purview of capital gains. However, investors can also submit 15H or 15G in order to be taxed at a lower rate.