Taxation of income distributed (hereinafter referred to as ‘dividend’) by

Mutual Funds

A. Old Tax Regime (Applicable for FY 2019-20)

1. What is the tax treatment of dividend received from Mutual Funds in the hands of unitholders?

Presently, dividend income received from Mutual Funds is exempt in the hands of the unitholders
(resident as well as non-resident) under section 10(35) of the Income-tax Act, 1961 (‘the Act’).

However, the Mutual Fund is required to pay dividend distribution tax (‘DDT’) on the amount of
dividend under section 115R of the Act.

2. What is the amount of DDT payable by Mutual Funds?

The Mutual Fund is required to pay a DDT under section 115R of the Act at the following rates
(excluding surcharge and cess) –

Category of Investors Equity Oriented Other than Equity

Scheme Oriented Scheme
(refer Note below) (refer Note below)
Resident Individual / HUF 10% 25%
Domestic Company 10% 30%
NRI 10% 25%*
*In the case of Infrastructure Debt Fund, the rate is 5%

Note: For the purpose of determining the tax payable, the amount of distributed income be increased to
such amount as would, after reduction of tax from such increased amount, be equal to the income
distributed by the Mutual Fund. The impact of the same has not been reflected above.

B. New Tax Regime (Applicable for FY 2020-21)

3. What is the new tax regime as per the Finance Act, 2020?

The Finance Act, 2020 has removed the levy of DDT in the hands of the Mutual Fund and adopted the
classical system of dividend taxation under which the Mutual Funds would not be required to pay DDT.
The dividend shall be taxed only in the hands of the unitholders.

However, the Mutual Funds shall be required to deduct tax at source (‘TDS’) on the dividend income at
prescribed rates for all unitholders i.e. resident/non-resident/FII/FPI.

4. What is the date of applicability of the new tax regime?

The new tax regime shall be applicable w.e.f. April 1, 2020 and will apply from FY 2020-21.
  

5. What type of Mutual Fund schemes are covered?

All types of Mutual Fund schemes are covered under the new tax regime, i.e. equity oriented and other
than equity oriented mutual fund schemes under dividend payout and dividend reinvestment options.

6. How will dividend income be taxed in the hands of unitholders?

The dividend shall be taxed in the hands of the unitholders at applicable tax rates provided under the Act
for the category of the unitholders.

7. When is TDS required to be deducted by the Mutual Fund?

TDS is required to be deducted at the time of credit of such income to the account of the unitholder or
payment of any income to unitholder, whichever is earlier.

Note: The amount of dividend reinvested under the dividend reinvestment option shall be deemed as
dividend paid and accordingly, TDS provision shall apply.

8. What is the TDS rate on dividend income credited / paid to resident unitholders?

As per section 194K of the Act, TDS at the rate of 10% should be deducted on dividend income credited /
paid to resident unitholders.

9. What is the threshold limit for applicability of TDS on dividend credited / paid to resident
unitholders?

Section 194K of the Act provides for a threshold of INR 5,000 in aggregate for the financial year. TDS
provisions should not apply in case where the amount of dividend credited / paid does not exceed the
threshold limit in a particular financial year.

Note: The threshold limit is applicable for aggregate dividend credited / paid in a financial year. The
same is to be computed at the PAN level.

However, on account of practical difficulties involved due to unique nature of mutual fund investments
and different schemes involved, HDFC Mutual Fund shall deduct TDS from each dividend declared i.e.
even without reaching INR 5,000 threshold. In case of total TDS exceeding the actual tax liability of any
investor, he/she can claim refund while filing income-tax return.

10. What is the TDS rate on dividend income credited / paid to non-resident unitholders?

As per section 196A of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be
deducted on dividend income credited / paid to non-resident unitholders (other than FII/FPI). There is no
threshold limit applicable in case of dividend income credited / paid to non-resident unitholders.
  

Separately, as per section 196D of the Act, TDS at the rate of 20% (plus applicable surcharge and cess)
should be deducted on dividend income credited / paid to FII/FPI. There is no threshold limit applicable
in case of dividend income credited / paid to FII/FPI.

11. What is the TDS rate on dividend income in case unitholder has not registered PAN in the folio?

TDS shall be deducted at the following rates in case PAN of unitholder is not available:
 Resident: 20%
 Non-resident: 20% (plus applicable surcharge and cess) 

12. What is the applicability of TDS provisions in case of unitholder having a PAN Exempted KYC
Reference Number (‘PEKRN’)?

There is no exemption provided from TDS provisions under the Act for a unitholder having a PEKRN.
Accordingly, it will be considered as a case of PAN not available, and TDS shall be deducted as
mentioned in point 11.

13. What is the applicability of TDS provisions in case of dividend credited / paid to minor?

As per section 64(1A) of Act, income of minor child gets clubbed with the income of the parent for tax
purposes. Accordingly, the parent should provide a declaration under section 199 of the Act read with
Rule 37BA(2) of the Income-tax Rules, 1962 to the Mutual Fund for TDS deduction under the PAN of
the parent.

In the absence of such a declaration, the Mutual Fund should deduct TDS on dividend credited / paid
under the PAN of the minor.

14. When will the Mutual Fund issue TDS Certificate?

The TDS Certificate shall be generated on the TRACES portal by the Mutual Fund and issued to the
unitholders on a quarterly basis as specified under the law.

15. Can a unitholder obtain a certificate from income-tax authorities for TDS deduction at a lower / nil
rate?

A resident unitholder may make an application to the income-tax authorities under section 197 of the Act
for obtaining a certificate for lower / non-deduction of TDS on dividend income credited / paid by Mutual
Fund.

16. Can a unitholder submit Form No. 15G for no TDS deduction?

A person (not being a company or firm) can submit Form No. 15G to Mutual Fund for non-deduction of
TDS under section 194K of the Act provided that the tax on his estimated total income (including such
dividend received from Mutual Fund) of the financial year is nil.
  

It is recommended that the form should be submitted on an annual basis at the start of the financial year at
any of the Official Points of Acceptance of HDFC Mutual Fund.

17. Can a unitholder submit Form No. 15H for no TDS deduction?

A resident individual (aged 60 years or more) can submit Form No. 15H to Mutual Fund for non-
deduction of TDS under section 194K of the Act provided that the tax on his estimated total income
(including such dividend received from Mutual Fund) of the financial year is nil.

It is recommended that the form should be submitted on an annual basis at the start of the financial year at
any of the Official Points of Acceptance of HDFC Mutual Fund.

18. Can a non-resident unitholder avail tax treaty benefit on dividend income received from Mutual
Fund?

As per the provisions of section(s) 196A/196D of the Act which is specifically applicable in case of
non-resident unitholders/FII/FPI, the Mutual Fund shall have to deduct TDS at the rate of 20% (plus
applicable surcharge and cess) on dividend income credited / paid to non-resident unitholders/FII/FPI, as
section(s) 196A/196D of the Act do not make reference to “rates in force” but provide the withholding tax
rate of 20% (plus applicable surcharge and cess).

The non-resident unitholders/FII/FPI may offer the said dividend income to tax in his income-tax return at
a lower tax rate by claiming the benefit under relevant tax treaty, if any, subject to eligibility and
compliance with applicable conditions.

Disclaimer: The information set out in the document is for general purposes only and is not an offer to sell or a solicitation to buy/sell any units 
of  Plans/Options  of  schemes  of  mutual  fund.  The  Fund/AMC  is  also  not  assuring  that  it  will  make  any  dividend  distributions  under  the 
Dividend  Option  of  any  of  the  Schemes.  The  information  set  out  is  neither  a  complete  disclosure  of  every  material  fact  of  the  
Income‐tax Act, 1961 nor does it constitute tax or legal advice. Investors should be aware that the fiscal rules/ tax laws may change and there can 
be no guarantee that the current tax position may continue indefinitely. In view of the individual nature of the tax consequences, each investor is 
advised  to  consult  his/  her  own  professional  tax  advisor.  The  information/  data  herein  alone  is  not  sufficient  and  shouldn’t  be  used  for  the 
development  or  implementation  of  an  investment  strategy  and  should  not  be  construed  as  investment  advice.  Investors  alone  shall  be  fully 
responsible / liable for any decision taken on the basis of this document. Neither HDFC Mutual Fund nor HDFC Asset Management Company 
Limited nor any person connected with it accepts any liability arising from the use of this information. The investors should before investing in 
the Scheme(s) of HDFC Mutual Fund make his/their own investigation and seek appropriate professional advice. 

MUTUAL  FUND  INVESTMENTS  ARE  SUBJECT  TO  MARKET  RISKS,  READ  ALL  SCHEME  RELATED 
DOCUMENTS CAREFULLY.