Mutual funds are a popular financial instrument among investors, thanks to their propensity to beat inflation. Systematic investment plans (SIPs) have made it possible for even low-income individuals to invest in such funds.

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In fact, most low-income earners prefer mutual funds over fixed deposits (FDs) owing to the absence of tax deducted at source (TDS).

What has changed for the mutual funds in Finance Minister Nirmala Sitharaman’s second Budget that was presented on February 1?

The Union Budget has introduced a 10 percent deduction of tax on income from mutual funds (dividend) if it exceeds Rs 5,000 a year from April 1.

Jitendra Solanki, a Delhi-based Sebi-registered tax and investment expert, says the TDS on mutual funds will have an adverse impact on individuals who do not fall in the taxable-income bracket. Under the new rule, these individuals will also have to file a return to claim the 10 percent TDS.

However, this will not impact those who already file returns. “Now, those who do not come under taxable income will also have to file returns with the Income Tax Department to avail of that deducted amount. This was mainly done, as the finance minister hinted, to bring mutual funds on a par with the FDs where TDS is already applicable on redemption,” Solanki pointed out.

At a disadvantage

Those who do not file returns will be now at a disadvantage if they do not know how to file returns. In this case, they have to take the help of a chartered accountant, which makes it a bit cumbersome for small mutual fund (dividend income) investors.

TDS would be applicable to dividend income from mutual funds.

“Currently, TDS on capital gains is deducted only for NRI investors in mutual funds and not for resident Indians. Resident Indians are required to pay taxes on a self-assessment basis,” Solanki noted, adding that TDS deduction will help authorities gather information on gains accrued by a taxpayer through mutual funds.

According to Balwant Jain, a Mumbai-based independent tax and investment expert, the impact of this will not be much as TDS is also applicable to bank deposit interest income over Rs 10,000. Instead of the dividend option, if they choose growth option and withdraw money through a systematic withdrawal plan, they can do so without paying TDS.

First Published:Feb 19, 2020 7:15 PM IST